For nearly two centuries, oil has remained the most accessible and practical source of energy known to humanity. The post-World War II industrialized world was built on the belief in a consistent and dependable energy supply. With a rapidly growing global population, industrial and commercial activities flourished. But, can the oil supply go on forever? In 1999, Mike Bowlin, the former chairman of the Atlantic Richfield Company in the United States, claimed, "We have already begun the last days of the oil age." At that time, his statement held some truth. Why has oil remained a pivotal focal point of geopolitical discord for well over a century? Why do only a few major nations seek to establish their strategic oil reserves? Has oil become weaponized in the contemporary era? Today, our journey embarks upon an exploration of the intricate universe of oil from multifaceted perspectives that encompass history, politics, and economics.

Summary

• Oil, as an organic compound conceived through the intricate processes of geology, emerges as a pivotal energy resource and a foundational raw material for the sprawling edifice of the chemical industry. This confers upon it the role of an elemental keystone within an intricate industrial framework. The origins of much apprehension regarding the scarcity of oil trace their roots to the framework of the peak oil theory, precipitating disputes and even armed conflicts among nations from the modern era onwards. This, in turn, has significantly influenced the strategic blueprint of the United States in the aftermath of the Second World War.
• The epicenter of global crude oil reserves primarily resides within the Middle East, with the United States, Saudi Arabia, and Russia ranking as the major oil-producing and exporting nations. The Saudi Arabian realm reaps the lion's share of profits due to its economical production processes. The economic upsurge witnessed in the sphere of developing countries, with China occupying a particularly prominent position, has acted as a linchpin propelling the global demand for oil. At existing production levels, it is anticipated that the world's oil reserves shall extend for an additional 47 years.
• The tumultuous oil price oscillations birthed by the oil crises of the 1970s, exacerbated by the crumbling of the Bretton Woods system, ushered in a period of global inflation. This milieu, in turn, paved the way for the emergence of the oil futures market. Presently, the principal yardsticks for global crude oil valuations consist of WTI (West Texas Intermediate) crude oil in the United States and Brent crude oil, a staple in Europe and Asia.
• Following the cessation of hostilities in the aftermath of World War I, seven multinational oil conglomerates hailing from the United Kingdom and the United States secured the rights for oil exploration. Through the curtailment of production, they succeeded in constructing a global oligopoly in the oil market. Subsequently, after the curtains were drawn on World War II, the relentless discovery of novel oil fields within the Middle East brought about a momentous shift in the epicenter of the global oil supply. The genesis of OPEC (the Organization of the Petroleum Exporting Countries) and the unfolding conflicts in the Middle East demarcated the inception of the first oil crisis.

Fundamental Oil Concepts

Oil, often referred to as crude oil, is a naturally occurring organic compound and represents a specific class of hydrocarbons. It is the result of prolonged geological processes acting on organic matter deep beneath the Earth's surface. This organic matter comprises materials like humus, algae, plant remnants, and microbial debris. Over time, these organic materials experience compression and transformation, eventually giving rise to oil. The chemical composition of crude oil varies across different regions, with distinctions between light and heavy crude oil. Typically, crude oil exists in a liquid state and is concealed within rock formations at depths ranging from 2,000 to 5,000 feet below the surface.

Crude oil stands as a precious energy resource. Its significance extends beyond merely meeting the energy demands of contemporary society; it serves as a vital source material for an array of chemical and industrial products. The oil industry encompasses a multifaceted industrial chain, spanning exploration, extraction, transportation, and refinement, yielding far-reaching impacts on the global economy and energy markets. The complete oil production chain encompasses the following stages:

• Upstream Exploration and Production: This phase encompasses the assessment, exploration, drilling, and processing activities in oil fields.
• Midstream Transportation: The transportation of crude oil from extraction sites to refineries is accomplished through various means, including pipelines, railways, trucks, and ships. Crude oil is stored in tanks to cater to subsequent stages.
• Midstream Refining: This process involves breaking down crude oil into different petroleum products such as gasoline, diesel, and kerosene, achieved through techniques like distillation and chemical processing, conducted in refineries.
• Downstream Distribution: This stage involves conveying refined petroleum products to end consumers, encompassing gas stations and industrial facilities.
• Downstream Sales and Consumption: Ultimately, petroleum products are retailed to consumers for diverse applications, spanning transportation, heating, and power generation. This encompasses the sale of gasoline and diesel at gas stations, as well as the supply of kerosene and liquefied gas to homes and industries.
• Petrochemicals: The oil industry further extends into petrochemicals, where crude oil is employed in the production of chemical products like plastics, fertilizers, synthetic rubber, solvents, and more.

Returning to Mike Bowlin's statement from the outset, in 1999, he declared, "We have already embarked on the final days of the oil age." At that juncture, we were on the cusp of the 21st century, and the peak oil theory had gained considerable traction. This theory, initially proposed by American geologist M. King Hubbert in the mid-20th century, posits that the production of chemical fuels follows a bell-shaped curve. Following the attainment of peak production, oil output gradually diminishes. This phenomenon arises from the increasing difficulty and cost of accessing oil reserves. Hubbert's projection notably anticipated the peak of U.S. crude oil production in 1971 at 9.6 million barrels per day, a record that endured until 2018 (current U.S. daily production approaches 13 million barrels).

Presently, global peak oil production is anticipated around 2030. However, this theory does not encompass advancements in petroleum geology and technology. Notably, approximately 30% of sedimentary basins capable of oil and natural gas production remain unexplored, while an active 30% necessitates further exploration (e.g., in Iraq). According to a 2020 reserves-to-production ratio, global oil production can be sustained at current levels for another 47 years.

When examining the global distribution of crude oil reserves, it's noteworthy that Venezuela, Saudi Arabia, Canada, Iran, and Iraq occupy the top five positions. Surprisingly, despite being a founding member of OPEC, an organization encompassing 15 countries in the Middle East, North Africa, and South America as of 2023, Venezuela's daily oil production barely reaches 2 million barrels, significantly lagging behind Saudi Arabia. This divergence can be attributed to several key factors. Firstly, Venezuela boasts a substantial reserve of heavy, high-sulfur crude oil, which translates to elevated production costs. Moreover, the country grapples with political instability, possesses limited petroleum infrastructure, and has a less diversified market reach beyond Europe and the United States. To further compound these challenges, it faces the considerable obstacle of its remote location from major consumer nations, rendering oil exports a complex and arduous endeavor.

Thus far in the current year, daily global oil production has reached 100 million barrels, primarily driven by Chinese consumption, the resurgence of aviation fuel, and petrochemical feedstock. OPEC countries contribute approximately 33 million barrels per day, and collectively with OPEC+ nations like Russia, they represent 60% of global production. Over recent history, the top three oil-producing nations have been the United States, Russia, and Saudi Arabia. These nations have experienced significant production declines at different times, but since 2014, their production has consistently neared a peak of 9 to 11 million barrels per day. Saudi Arabia, boasting the lowest production cost of less than $20 per barrel, maintains a substantial lead in annual oil export profits when compared to the current production cost of Brent crude oil, which exceeds $40 per barrel.

Saudi Arabia and Russia also claim top positions as oil-exporting nations, with daily export volumes reaching 7.36 million barrels and 4.78 million barrels, respectively. With the continuous advancement of U.S. shale oil technology, the United States has transitioned from a net oil importer to a net oil exporter. In 2022, the United States secured its position as the fourth-largest oil-exporting country, surpassing Iran, with daily exports of 3.6 million barrels.

In terms of oil consumption, the United States, China, and India rank as the top three countries. China notably achieved a historical milestone in the first half of 2023 by importing an average of 11.4 million barrels of crude oil per day, marking a 12% increase compared to the previous year. China accomplished this while simultaneously saving nearly $10 billion in costs by procuring substantial quantities of oil from Russia, Iran, and Venezuela—nations under Western sanctions.

The Petroleum Financial Market

Oil companies currently have three primary channels for procuring oil. The first involves actual physical trading in the spot or cash market. The second entails bilateral contracts directly with oil-exporting nations, allowing for the purchase of crude oil directly from oil wells or production facilities. The third channel revolves around futures contracts in the petroleum market, permitting buyers and sellers to purchase or sell crude oil at agreed-upon prices on specific future dates.

As of now, futures market trading typically accounts for 70% to 90% of global oil transactions. However, it took nearly a century from the advent of the world's first commercially exploited oil well in 1859 for petroleum to emerge as a financial product in the 1970s, eventually evolving into the modern oil financial market.

This transformation was precipitated by the breakdown of the Bretton Woods system, the decoupling of the U.S. dollar from gold, and policies pursued by oil-exporting nations, particularly OPEC countries. These policies involved price hikes and supply reductions, which led to a substantial surge in oil prices. Concurrently, a series of geopolitical events and tensions, including the Six-Day War of 1967 (the Third Middle East War), the Yom Kippur War of 1973 (the Fourth Middle East War), and the Iranian Revolution of 1979, contributed to significant oil price volatility. This instability was exacerbated by global inflation, and rising oil prices were regarded as an investment instrument to hedge against inflation. Consequently, this caught the attention of financial institutions and investors.

Oil prices, as a measure of value in oil trading, are denominated in barrels, with one barrel equivalent to 159 liters. Initially, oil prices were primarily under the control of the OPEC. However, by the 1980s, OPEC found it increasingly challenging to unilaterally control oil prices. Consequently, the Mexican state-owned oil company proposed a market-linked pricing mechanism in 1986, which was widely embraced, and it became the price benchmark for international crude oil trading.

The two current major global crude oil price reference standards are West Texas Intermediate (WTI) and Brent crude oil, both denominated in U.S. dollars. WTI is a light sweet crude oil originating from the West Texas region, known for being lighter, sweeter, and having lower sulfur content compared to Brent. WTI futures are primarily traded on the New York Mercantile Exchange (NYMEX) and its pricing is based on delivery to Cushing, Oklahoma, a pivotal oil hub. In contrast, Brent crude comes from the North Sea region, and while it's slightly heavier and more acidic than WTI, it's still considered light crude oil. Futures contracts for Brent are chiefly traded on the Intercontinental Exchange (ICE) in London, and it is widely recognized as a reference in the international crude oil market, particularly in Europe and Asia.

Seven Sisters and OPEC

The history of oil has been closely intertwined with warfare. World War I showcased the significance of modern transport tools like trucks, tanks, and internal combustion engine-powered airplanes. By the 1920s, automobiles were becoming prominent means of transportation, which significantly increased industrialized nations' demand for oil. Simultaneously, the "Seven Sisters," seven major Anglo-American multinational oil companies (Standard Oil of New Jersey, Standard Oil of New York, Standard Oil of California, Texaco, Gulf Oil, British Petroleum, and Royal Dutch Shell), signed the Achnacarry Agreement. This agreement involved the sharing of refinery and storage facilities and collectively limiting production to maintain high prices, thereby establishing a commercial oil monopoly.

During World War II, the United States imposed an oil embargo on Japan in 1941, which was one of the triggers for the Pacific War. Nazi Germany, aiming to control the Caucasian oil fields, tore up the Molotov-Ribbentrop Pact, leading to a reversal of the European war situation. In a way, Japan and Germany were never able to secure a reliable source of oil, which eventually led to their defeat by the more strategically mobile Allied forces. At that time, the Allies controlled 86% of the world's oil.

After World War II, in 1948, the largest conventional oil field in the world, the Ghawar Oil Field, was discovered in Saudi Arabia, and subsequently, the Middle East continued to unveil new oil fields. As a result, the center of global oil supply gradually shifted. However, until the first oil crisis of the 1970s, the Organization of the Petroleum Exporting Countries (OPEC), founded in 1960 by Saudi Arabia, Iran, Iraq, Venezuela, and Kuwait, was not yet in the dominant position it would later achieve. The "Seven Sisters" and their oil cartel held sway over oil production rights in the Middle East, with oil prices remaining relatively low. Western Europe, Japan, and the United States were enjoying robust post-war economic growth, partly fueled by the Marshall Plan, while U.S. oil companies progressively assumed control of interests acquired from the British colonial era, cementing their central role in the oil stage.

Starting in 1970, OPEC began to control more than 55% of global oil supply and determined production quotas based on the oil reserves of each member country. At the same time, it initiated the process of nationalization in the oil industry. In 1972, 25% of the oil business in OPEC member countries was nationalized, reaching 51% in 1983. Concurrently, the United States was deeply entangled in the quagmire of the Vietnam War, and it greatly expanded its credit. Many countries became concerned about the devaluation of the U.S. dollar, and some began exchanging dollars for gold (which was pegged to $35 an ounce). This led to a depletion of U.S. gold reserves to a critical point. In 1971, President Nixon declared the U.S. would no longer convert dollars into gold. The U.S. government granted the Federal Reserve permission to print U.S. dollars, and as a result, inflation rapidly spread to various commodity prices, including oil. Between 1970 and 1973, oil prices soared from $1.80 per barrel to $3.29, marking the onset of the first oil crisis. In the next segment, we will continue to explore the impact of the two oil crises on global politics and economics, the emergence of a multi-polar oil landscape, and how modern warfare and technological advancements have propelled changes in current oil supply and demand.