Courtesy Reuters

Most of us think of the oil industry as a modern development, but actually its roots lie far back in history. Noah, the tourist from Ur, pitched his Ark inside and out with tar from the seepages near his native city, and Herodotus reports that Alexander was astounded in Kirkuk by natives who wet down the streets with naphtha and then set fire to them. Bricks from Ur tell us that the ratio between the price of wheat and of asphalt was much the same three thousand years ago as it is today.

But the modern industry really began with the invention by Colonel Edwin L. Drake of a steam-driven rig for drilling for oil, though in principle he had probably been antedated many centuries by the Chinese drillers for brine near Chungking. The impetus for Drake's venture was the pursuit of a source of light. Whales were getting scarce and the distillation of oil from shale in Scotland and New Brunswick was costly. Benjamin Stilleman, the Yale chemist, when asked to report on some samples of seepage from Pennsylvania, drew a glowing picture of the future of "rock oil"; and so in 1859 the search for it began and we were on the road to the oil industry as we now know it.

The commodity was new and different. It was liquid, inflammable, poisonous, explosive-in fact, it had most unpleasant characteristics, so that in its first years the industry spent a great amount of ingenuity in devising its own special means of refining and transporting its product. The tank car, the pipeline, the tank wagon, the tank ship were all gradually developed and there resulted that peculiar vertical integration of the industry by which the raw product was refined and then handled right through from the well to the ultimate consumer. This very integration has often been regarded by anti-trust lawyers as a sinister attempt at monopoly while really it was a natural response to the strange nature of the product and the immediate pressing problems of the market place.

One of the early characteristics of the industry was its trend to standardization. The codes of almost all our states are filled with inspection laws relating to the flash point of kerosene, and it was not without reason that the largest unit in the industry adopted the name "Standard" oil company. By the close of the century a new element, the internal combustion engine, developed a voracious appetite both for those oil fractions so dangerous in lighting oil and the heavier oils needed for lubrication. Hence the opening years of the century were spent in the struggle over cracking patents-the secrets of processes that enabled one to modify the refined yield of crude oil to the ratios required by the market.

In the meantime the burgeoning demand for petroleum had raised grave doubts as to its future. The experts were at odds as to the size of the possible supply, and the political situation was complicated by boasts of irresponsible Englishmen that they had a corner on foreign supply. The First World War emphasized the military importance of oil. "The Allies floated to victory on a sea of oil," said Lord Curzon. But the British corner proved illusory as did the judgment of the experts. New methods of deciphering the structure of the earth, the torsion balance and seismograph, were applied to the search for oil fields in the United States, while the discovery of new oil pools in Venezuela, Iran and Iraq provided assurance that the supply problem would be solved. The development of the automotive industry on a world-wide basis made oil fuels a necessity. Oil was everyone's need. It perhaps supplied some primitive desire latent in all men to be "somewhere else." At the same time the substitution of oil and gas for coal as a source of power further increased the demand.

The prophet of this age was the British Admiral, Lord Fisher, who was charged with being an oil maniac because he insisted upon converting the British fleet from coal to oil. Today, practically all shipping is oil fired. Oil consumption in the United States has increased over a hundred times between 1900 and 1962, while automotive vehicles operating on roads increased from 1,000 to 90,000,000. This transformation did not happen quite as rapidly abroad, but it is happening. The automotive vehicle, first built for pleasure, has by modification and adaptation become the workhorse of the world. Areas formerly inaccessible are now in direct communication with all the arteries of trade, and no longer is there the excuse for famine at one spot and abundance at another. Markets little known and isolated are now easily tied into the circles of world commerce. This process, already highly developed in the United States, is gradually penetrating the world. Only in the Communist sphere do we see it delayed by intent.

In the United States, government policy has protected the domestic industry both by tariffs and the restriction of imports from certain areas. This policy originated in the desire to make the country self-sufficient in case of national crisis. This has led to endless debate in Congress and to production restrictions by the states. It has also led to higher prices for oil products. However, it has promoted the development of an oil-tool industry which continually experiments in methods and instruments; this increases the recovery of petroleum from its geologic reservoirs-and the technology then becomes available throughout the world. At present, too, the oil industry is pushing its prospecting out to sea, and the probability that deposits will be found and exploited beyond the 100-fathom line will raise some interesting international problems which may lead to modification of the Truman proclamation on the title to oil on the continental shelf.

All this has led to the growth of industrial and economic problems that we have only begun to appreciate. In the first place, the deposits of oil are restricted in area and many of the most massive occur in countries with little else in the way of resources and often with scanty population. Some examples are Venezuela, Kuwait, Saudi Arabia, Abu Dhabi, Iraq, Iran, Qatar, Algeria and Libya. As a result of oil production, a stream of foreign exchange is now pouring into these countries and is only beginning to show its effects. The Persian Gulf countries today receive in taxes and royalties something over an equivalent of $1.5 billion per annum while other expenditures by the oil producers, such as payments for services and purchases of native products, bring the total well above $2 billion per year. Venezuela receives annually in royalties the equivalent of $700 million.

Everywhere in these areas new schools, roads and ports are being built and the ceaseless mill of trade is stimulated. Real estate is pyramiding in value. Some of the most desperately poor countries have by this turn of fortune become wealthy. The uneducated are being educated. In the Middle East illiteracy will become a thing of the past in less than a generation. One can only guess at yearly incomes per capita received by the major oil- producing states, but perhaps in Kuwait it now exceeds $2,000, in Saudi Arabia $1,000, in Venezuela $1,500 and in Qatar $3,000. Such countries are becoming welfare states.

It must be remembered, too, that this is only the beginning of a long train of events. As yet the inevitable multipliers of income have not appeared in full force-the specialized financial institutions so important in a modern society, such as insurance companies, building and loan associations and all the other modern specialized devices for handling funds. At present much of this money is being invested abroad. For instance, Kuwait's investments in the London market exceed the equivalent of $750 million. It is said that this is necessary to protect a wasting asset, but the reserves of Kuwait are so great that at the present rate of production the Sheikhdom would have well over a hundred years' supply. Provision for such a remote event as the exhaustion of these reserves seems an extraordinary precaution, especially as political events which might take place over that period can hardly be foreseen.

The last published figures indicate the proven reserves of the Middle East to be about 187 billion barrels. Experts who know the area believe that in time total recoverable reserves of liquid hydrocarbons may well reach 500 billion barrels (providing prospecting is allowed to continue). For each barrel produced, about $1.00 in foreign exchange has so far flowed into the economies of these countries in the form of taxes, royalties and expenditures in local markets for goods and services. The future would look bright indeed if there were no political problems to obstruct development, and if the golden flow were invariably harnessed to constructive purposes.

One of the unsettled problems of the area is that of boundaries. In the desert, the "dirah"-the shifting territories of the Bedouin tribes-did not lend themselves to the fixed limits we like in the modern world. In the past, one square mile of desert looked much like the next. But a square mile of desert underlaid by an oil field may yield 60 million barrels-which makes it very different from one which is not. There are few fixed boundaries in the Persian Gulf, whether on the land or at sea. In terms of oil prospects, the floor of the Persian Gulf itself is one of the most interesting areas in the world.1

The boundaries in this area must therefore be determined, for ultimately we shall come across several promising structures which cross international boundary lines at sea and which will become the source of international disputes. One is already known between the island of Bahrein and Saudi Arabia, but agreement has been reached regarding its development. At present, however, we do not know what the boundary is between Saudi Arabia and the Kuwait Neutral Zone at the north end of Safaniya. It has been estimated that between the various possible interpretations of this boundary at sea there is a difference of several million barrels of oil reserves. The legal basis for these various boundary lines has to be explored. The Gulf must be carefully mapped and countries concerned must agree as to their actual interest.

Land boundaries are equally controversial. For instance, the positions of very few Saudi Arabian boundaries have been settled. Fortunately, the question has not so far arisen with respect to any particular producing field, but that such questions will arise shortly is not to be doubted. The only fixed land boundaries of Saudi Arabia on which there is complete agreement at present are those with the Neutral Zone to the south; with the Yemen, for a relatively short distance; and with Bahrein in the Gulf itself. The boundaries to the east and south of the country have been subject to perennial dispute between Saudi Arabia and the British, representing the various sheikhdoms and the Sultan of Muscat. The Murban field now being developed in Abu Dhabi will probably cover areas to which the Saudis lay claim. The Burami dispute is now under arbitration among Saudi Arabia and the British protected states of Abu Dhabi and the Sultanate of Muscat. Ancillary questions involve rights-of-way and the use of ports.

All of these matters will be the subject of political discussion between the governments and will affect the interests of the various concessionaires involved. Boundary questions and disputes over pipelines have already arisen between Tunis, Libya and Algeria, and the projected pipelines are going to raise others. In any event, the oil industry finds itself in the background of international disputes which will grow in importance.

The influx of vast wealth into these countries may further disturb inter- governmental relations. Rich sheikhdoms will exist, side by side with some of the most poverty-stricken areas in the world. For example, I believe that very shortly the small community of Abu Dhabi will be receiving royalties and rentals in the neighborhood of $50 million per year, which is $10,000 per person for its present population, while its neighbor Dubai, which so far has no oil at all and almost no resources, cannot be expected to have an average individual income above $100 per year. These contrasts are bound to create serious political problems.

Another series of problems affecting the political situation involves concession terms, the most important provision of which has been the 50-50 split in profits which predominates in the industry today. Any serious change in the terms of any of the great concessions is almost certain to prompt a similar change in the terms of all other agreements. For instance, should the terms of the concession in Indonesia be altered to 60-40 in favor of the producing country, this will undoubtedly spread to Venezuela, the Middle East and to concessions on the African continent. Similarly, the demands of the Iraqi Government on the Iraq Petroleum Corporation for the surrender of all concession acreage not so far developed have already been reflected in Kuwait, where the same sort of demand has been made.

One of the most pervasive effects of the oil industry has been the social change induced in the producing countries. This has extended from the development of education to alterations in the social and governmental structure. The increase in wages caused by the oil business disrupts the established social forms, and this in turn creates problems of both a political and social nature. The encouragement of education, the liberalization of governments, the impact of tremendous public works, are associated directly with the industry. Even such matters as the status of women and children are affected by the operation of the companies.

As the largest item in international trade, oil has a profound effect on the balance of payments of importing countries. Because petroleum products are desperately needed in the modern world, governments without petroleum resources take every possible step to reduce the consequent drain on their foreign exchange. The usual process is to erect local refineries and transport the crude oil in locally owned tankers, or on a ship which will accept local currency for its services. Then the only burden on foreign exchange is to pay for crude at its port of embarkation; refining and transport costs are in the currency of the consuming country.

The balance-of-payments problem of the major oil consumers is further complicated by the fact that the producing countries are not great consumers of their manufactured goods. On top of this, oil imports may hurt local fuel and power industries. For instance, cheaper petroleum products affect the coal production of the Saar and Ruhr Basins, and the mines of Pas de Calais and southern Belgium. To protect these industries, heavy taxes are often levied on oil. The production and transportation of gas, the inevitable partner of oil production and itself an industry still in its infancy, will further complicate this tenuous balance of international trade.

The reason gas has not been more important in Europe is that political tensions in the surrounding areas discourage investment in fixed installations. Pipelines are immovable while ships can be transferred to other scenes; transportation therefore tends to be by ship. It is to be hoped that some time a general pipeline treaty may be arrived at which will permit gas and oil to flow freely across international boundaries into areas where they are needed; no such world-wide arrangement seems probable at present.

The result of all this has been a growth in basic competition in the industry. Gone are the days when one could speak of "the Big Five." Competition has sprung from every corner. Because of the importance of liquid fuels, even governments have entered the race: the Yaciementos Petroliferos Fiscales of Argentina and Bolivia; Petrobras in Brazil; the semi-governmental companies such as Azienda Generale Italiana Petroli in Italy, Compagnie Français de Petrol; and indeed, we might add the British Petroleum Corporation. In the meantime innumerable smaller groups have entered the race for reserves, such as American Independent, Panam International, Getty Oil Company, Oasis Petroleum, Iracom and Japan's Arabian oil company. This list does not even touch upon the numerous independents on the South American scene, from the Argentine to Venezuela.

One of the most important developments affecting the market for crude petroleum is the Russian invasion of European and other markets. This may be caused in part by the Soviet need for foreign exchange, but the Russians clearly are not averse to using oil as a political weapon, whether in Europe or the Far East or Cuba. In response, the great oil-trading corporations may start to sell oil in the Iron Curtain countries, where the Russians are now demanding a high price. Perhaps as a result of all this the Russians will, as they did in the 1920s, arrive at some kind of arrangement with the big oil traders in which the Soviets settle for a percentage of certain markets. This reflects the fact that state trading in oil has all the vices which are alleged to be a part of cartel organizations, compounded by the use of political power.

The construction of large pipelines from the Perm Basin at the foot of the Urals to both Black Sea and Baltic ports makes it clear that the Soviet Union intends to increase its exports. This, of course, is being done at present at the expense of its internal market. The Russian planners have preferred to put their investment capital in steel for munitions instead of into roads and automobiles. The result is that in the Soviet Union per capita consumption of oil products is about one-quarter of that in the United States.

We know that Russian reserves must be very great, and that for a long time to come Russia will continue to be an exporting country, using its oil resources in support of Communist penetration and therefore as a political weapon. In Cuba, it is doubtful if Castro could have maintained himself in power without the support of Russian oil; probably the same can be said of Red China. The Russians also, we know, have long had ambitions to press southward into the Persian Gulf countries-a fact that was emphasized in some of the discussions between the Russians and the Germans at the opening of World War II.

Parallel with the invasion of the European markets by the Russians has come the development of an intergovernmental body which is devoted to maintaining the prices and increasing the market for oil products. The Organization of Petroleum Exporting Countries (OPEC) is already discussing the mutual interests of its members, particularly regarding the price and distribution of petroleum products, and concession terms. Should the combination of petroleum-producing states, through OPEC, be able to dictate the price at which oil is sold, it would mean, in effect, that oil prices would be set in the political councils of government. This would present grave obstacles, for international producers often produce under one sovereignty, refine under another and sell under a third. The interests of the various countries are not parallel. The companies exist in the area between these sovereignties and serve as a highly useful connection and mediating force among them. In his "Twentieth Century Capitalist Revolution," Adolf Berle points out that the great corporations engaged in international trade perform a function analogous to that which St. Augustine of Hippo proposed for the Papacy after the fall of Rome. Whatever the force of this parallel may be, it is true that the major oil companies perform a most necessary type of international public service. The further growth of this responsibility will be a complicated process, depending in large measure on what obligations the trading companies may wish to assume in order to assure their own survival. 1 Five important fields are already developed in the seaway: the new discovery by Panam International off the coast of Iran; Safaniya off the coast of Saudi Arabia, with its extensions into the Neutral Zone, now being developed by the Japanese; the Shell discoveries off the coast of Qatar; the British Petroleum and Compagnie Français discovery off the Island of Das in Abu Dhabi.