CapitalistImperialistPig

As a dynamical system, oil prices have long displayed a rather unstable behavior. A number of factors have contributed: a long history of exponential growth in demand, the long time constant of the feedback of prices on supply, and the unpredictable nature of the discovery of new oil resources. As a result, oil prices and oil supply suffered from dramatic swings, and as the world became more oil dependent, these swings wrecked every widening paths of economic destruction. One of the first to clearly realize this was John D. Rockefeller, and his answer was the Standard Oil Trust. Besides giving him and his investors immense personal profits, Standard created safer standardized oil products and regulated production to maintain stable (and high) prices. Motivated in part by Ida Tarbell's scathing exposes, the Trust was ultimately dismantled, and consumers got lower prices but also an unstable market. The ferocious competition unleashed that drove down prices also resulted in a ...

There were two great oil shocks of the 1970s, in 1973, due to the Arab oil boycott after the 1973 Arab-Israeli War, and in 1978, the withdrawal of Iranian oil accompanying the revolution. The net effect of the first was to give the oil exporting nations full control over their resources, including the ability to break contracts at will. The second was a catastrophe mainly because of an induced panic, due disruption of supply agreements and inventory buildup by everybody from countries to consumers - American motorists, for example, went from keeping their gas tanks 1/4 full on average to 3/4 full - billion of gallons of gasoline withdrawn from the market at once. Perhaps the central fact at the heart of these crises was the US transition from oil exporter to huge oil importer. Many had warned of this threat, including President Jimmy Carter, but when the catastrophe hit the prophet had no honor in his own country. The US was burdened by efficiency destroying price controls and al...

President Carter and spouse decided to spend News Year's day with the Shah of Iran and his wife, because they liked the company as well as for reasons of international politics. The Shah has recently relaxed his hawkish views on oil prices, and was regarded as an essential prop against the soviet Union. Carter also wanted to show his gratitude to the Shah for his progress on human rights and his switch of position on oil prices, which was seen as a major concession on the part of the monarch. Moreover, the President was regretful and embarrassed over the rioting and tear gas that had greeted the Shah’s arrival on the South Lawn of the White House, and he wanted to clear up any misunderstandings, within Iran and outside the country, and firmly underline American support. So, at a New Year’s Eve banquet, he rose to offer a memorable toast. “Iran, because of the great leadership of the Shah, is an island of stability in one of the more troubled areas of the world,” he said. “This is...

The 1973 war, the oil embargo, and a world-wide shortage of oil allowed the Arab nations to seize full control of their oil resources, and control prices.  The resulting four-fold price increase plunged the developed nations into an intense recession and prolonged inflation.  Within a couple of years, the recession eased, but inflation continued. If the results were bad in the developed world, they were catastrophic for the non oil rich developing world. The group that suffered the most from the price increases were those developing countries that were not fortunate in having been blessed with oil. The price shock was the most devastating blow to economic development in the 1970s. Not only were those developing nations hit by the same recessionary and inflationary shocks, but the price increases also crippled their balance of payments, constraining their ability to grow, or preventing growth altogether. They suffered further from the restrictions on world trade and inves...

A half dozen of the most senior American national security officials were summoned to a hurriedly called late-night emergency meeting in the White House Situation Room. Nixon himself was not awakened for the meeting on the advice of Alexander Haig, who told Kissinger that the President was “too distraught” to join them. Some of the participants were surprised to find that the President was not there. The officials grimly reviewed the Brezhnev message. Direct Soviet military intervention could not be tolerated; it could upset the entire international order. Brezhnev could not be allowed to assume that the Soviet Union could take advantage of a Watergate -weakened Presidency. There was further reason for alarm. Over the previous few hours, United States intelligence had “lost” the Soviet air transport, which it had been tracking as the planes ferried arms to Egypt and Syria. No one knew where the planes now were. Could they be on their way back to Soviet bases to pick up the airborne tro...

Sadat's surprise attack had caught the Israelis by surprise, and they were reeling. The Prime Minister was bluntly warned that "The Third Temple was falling. Ammunition and other military supplies were desperately short. The Soviets had already begun a massive resupply effort to Syria and Egypt. Wary of offending the Arabs, Washington first hesitated, then rushed supplies into Israel in an effort that was intended to be secret, but thanks to wind and weather, wasn't. Simultaneously, the Arab Oil countries unilaterally raised the price of oil by 70% [to $5.11/barrel!]. The Arabs were deciding how to use the oil weapon. Meanwhile, back in Washington, the Saturday Night Massacre had occurred and Nixon became preoccupied with the ongoing Watergate induced collapse of his presidency. Kissinger was running US foreign policy. But resupply of Israel had succeeded, and then it became Egypt's Third Army that was on the brink of annihilation. Soviet leader Brezhnev blu...

On Yom Kippur, October 8, 1973, Anwar Sadat and Assad launched a surprise attack on Israel. The surprise was nearly complete, but it shouldn't have been. Israeli and American intelligence had had explicit warnings, but chose to disbelieve them. Months earlier, King Faisal of Saudi Arabia had warned that trouble was brewing if the US continued its lockstep support of Israel. On a visit to President Nixon at his home in San Clemente, an agitated Leonid Brezhnev had had Nixon awakened in the middle of the night to give him a similar warning. Oil executives at ARAMCO had been warned by the Saudis in similar fashion and had passed this information on to the the press and the government. The Arabs had made two previous attempts to wield the oil weapon, in the 1956 Suez crisis and the 1967 Israeli war, but had failed both times, due to excess capacity in the US and their own disunity. But by 1973, all that had changed. Oil capacity was tight and US production was falling. This t...

The trouble with oil was competition. Competition drove down prices and made it hard to make a buck. John D. Rockefeller was perhaps the first to do something about it, by establishing the vast cartel of Standard Oil and dominating all aspects of oil in the United States, and most of the rest of the world. Government got into the act in a big way in World War I, when Churchill and others converted the fleet to oil propulsion, and got the UK to invest directly in oil production in Persia. After the war, the explosive growth of the automobile and other machines propelled by internal combustion produced first shortages and then the discovery of vast new oil fields, notably the enormous East Texas field. Its enormous production drove the price of a barrel of oil down by a factor of ten, and everyone in the business was losing their shirts. The Texas economy, and perhaps law and order, were on the verge of collapse. 3 For some time, Texas Governor Ross Sterling, a founder and f...

Warren Harding was elected President in 1920 and appointed Albert Fall, Senator from the eight year-old State of New Mexico, as Secretary of the Interior. Fall wrested control of the supposed Naval Oil reserves from the Navy (Naval Officers objecting were posted to remote locations) and leased them to a couple of oil men in return for enormous bribes by the standards of the day. Harding died as the scandal widened, and Fall went to prison. Harry Sinclair, of Sinclair Oil, one of the bribe payers, did a brief jail term for contempt of Congress, but none of the bribe payers was convicted of their part in the actual crime. The money for the bribes, it turned out, had also come from the Federal government's coffers. Republicans like Fall were not the only recipients of bribes - so were some prominent Democrats, including the early front runner for the Presidential nomination.

Standard Oil had won total domination of the US Oil industry and the world wide market for kerosene - its then most valuable product - by the 1870s, but the Nobel brothers brought modern technology to the oil fields of Baku and soon Russian production had become a significant factor, taking back the Russian market. After a railroad and pipeline reached the Black Sea, thanks to Rothschild investment, Europe was opened to Russian Oil, and by 1990 1890 a three cornered fight between Standard, the Nobels, and the Rothschild companies for global dominance was in full swing, with new technology for transport developing explosively - or actually the reverse, since a major point of the technology was avoiding the explosions that plagued some early transportation efforts.

I think I've read that the phrase "invisible hand" occurs only once in Adam Smith's Wealth of Nations, but nothing else from economics is so sacred or sacralized. His insight was that the workings of a competitive market would produce a number of socially desirable outcomes. This insight was central to classical economics, and, dressed up in mathematical glad rags, central to neoclassical economics, and its offspring, like the Real Business Cycle theory. Now Adam Smith was a very clever fellow, and he knew that business men really hated free competition, and would work the levers of power to eliminate it, but he probably underestimated their skill at eliminating it. The story of the Standard Oil Trust, as told in Daniel Yergin's The Prize , is the classic example. Once drilling for oil and simple distillation (refining) techniques were developed in the 1860s, the oil market quickly became chaotic, as production of kerosene outpaced demand. Boom was followed b...

Daniel Yergin's book of that title is as good as the reviews promise - even better. The Prize: The Epic Quest for Oil, Money & Power (1992, 2008) won the Pulitzer, and it's easy to see why. Oil is probably the most pivotal commodity in the modern economy, and he tells its story with wit and style, including all sorts of telling details. Oil was known in ancient Mesopotamia at least 5000 years ago. Bitumen was used as mortar for the walls of Jericho and Babylon. It is one of the most global of commodities. Kerosene, its first commercially important product was refined in the 1850s, named by a Canadian. Its first good lamp was invented in Vienna, imported to the US and exported to the world. The drilling techniques first used to recover "rock oil" in Pennsylvania were invented for extracting salt 3000 years ago in China.

Paul Krugman looks at oil, and now I am getting nervous. There are two basic facts that would seem to explain a lot about what’s happening to oil prices. First, Gross World Product growth has accelerated — from 2.9 percent in the 90s to almost 5 percent in recent years, according to the IMF. All of this is because of growth in emerging economies, largely China. Second, world oil production has stalled — after growing around 1.6% a year in the 90s, it’s been basically flat . . . . . . This is what peak oil is supposed to look like — not Oh My God We’ve Just Run Out Of Oil, but steady pressure on the economy and the way we live from rising energy prices and their consequences. And it doesn’t matter much whether we’re literally at the peak, or whether production can rise by a few million more barrels a day; unless there are big sources of oil out there, we’ll be feeling peakish for the foreseeable future. It seems quite possible to me that there really still is quite a bit of oil out t...

The current US economy is highly dependent on the willingness of the big international dollar holders - China, the Gulf States, Russia, Japan, and others - to lend us money at cheap rates. So far, this has been a dubious financial decision for them, since the decline of the dollar means that they keep losing money. Brad Setser takes a look at some historic parallels. They aren't entirely encouraging. Surprising enough, owing a lot of money has a way of weakening your status and bargaining position. For the present, and for the foreseeable future, we are addicted to that cheap Chinese and oil exporter crack. The only things likely to improve our international standing are cutting back on our oil use and balancing the budget.

Stuart Staniford at the Oil Drum takes a close look and see the world's largest oil field in decline. ...Saudi oil production has been falling with increasing speeed since summer 2005, and overall, since mid 2004, about 2 million barrels of oil per day in production has gone missing (about 1mbpd in reduction in total production, and about another 1mbpd in that two major new projects, Qatif and Haradh III, failed to increase overall production). That's 2.5% of world production and, if that production hadn't gone missing, gasoline in the US likely would still be somewhere in the vicinity of $2/gallon instead of well over $3. I will analyze six or seven separate lines of technical evidence, and argue they all point to a consistent picture, which says that the answer to both questions is "Yes". Yes, the northern half of Ghawar is quite depleted. And yes, this probably explains at least part of recent production declines. Furthermore, it is likely that more declines ...