Term Paper on "Oil Industry"

Term Paper 13 pages (4488 words) Sources: 1+ Style: MLA

[EXCERPT] . . . .

Oil Industry: Background and History

In historical terms the oil industry began more than five thousand years ago. In the Middle East oil was used in"... waterproofing boats and baskets, in paints, lighting and even for medication" (History of the oil industry). Oil and oil usage is evident in human society even in ancient times where the use of oil was used for medical, domestic and building purposes and not seen as a fuel as it is today. For example, the Bible refers to pitch being used for building purposes in the cementing of the walls of Babylon. (History of Oil Use) Even as late as the 1800s, oil was seen as "...a disinfectant, a vermin killer, hair oil, boot grease, and a cure for kidney stones" (History of Oil). In the 4th century the Chinese drilled for oil and natural gas. ("Oil Industry")

However when whale oil became less abundant there was a search for news ways to obtain oil. The first modern oil well was dug by Edwin Drake in Titusville, Pa, which began the first oil rush. This was to lead to the construction of the first oil refinery in 1861. ("Oil Industry") Subsequently, in the 19th century many of the larger oil companies were founded. During the Civil War, John D. Rockefeller was to invest in oil and Standard Oil as created in 1870. This company "...refined about 95% of the United States' oil in 1880" ("Oil Industry"). However Standard Oil was split into more the thirty companies in 1911 due to the fact that it was declared an illegal monopoly. Among these new companies were Esso or Exxon, Mobil, Chevron, Atlantic Richfield (later ARCO), and Amoco. Shell (1907) and British Petroleum (1909) were also established in this period. ("Oil Industry")

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The increase in the production of automobiles and their common use also influenced the oil industry and spurred its growth. "In 1900, worldwide crude oil production stood at nearly 150 million barrels. Illuminants served as the primary product of the oil industry, but new inventions such as the automobile and the airplane used petroleum as fuel..." (Petroleum Industry).

This also increased the need for new oil resources and the large Texas oil fields were exploited in the 1930's. Furthermore, Chevron, Texaco, Exxon, and Mobil expanded their oil reserves by "...purchasing the rights to the extensive Saudi Arabian oil fields for only $50,000 from the king in 1946 oil replaced coal as the world's most popular energy source" ("Oil Industry"). In a more contemporary sense the oil industry as we know it today began in the early 1900s; and escalated with the advent of World War Two; while before had been an oversupply of oil before the war, the advent of World War Two "...taught government the importance of having a safe supply of oil" (History of Oil).

An extremely important part of the history of the oil industry is the formation of Organization of Petroleum Exporting Countries (OPEC) in 1960. OPEC as the dominant force in the oil market, "...required that the major oil companies provide them with a larger percentage of the profits from their fields." ("Oil Industry"). This was to result in an oil embargo in 1973 and the increase of OPEC oil prices in 1981. This also led to an international energy crisis which illustrates the extent to which many counties in the world had become dependent on oil as an integral part of their economies. " the resulting energy crisis forced many developing countries to pay more for energy, negatively affecting Third World debt; industrialized countries implemented new measures to conserve and develop new sources of energy" ("Oil Industry").

Countries like the United States begin searching for new sources of oil and this research extended to the exploration of the Alaskan oil fields, as well as the oil fields in the North Sea. Subsequently, with these additional resources, the price of oil declined and evened out until 1999. In that year OPEC again reduced production in order to increase worldwide prices.

Therefore it is evident from even a brief glimpse at the convoluted history of oil that the impact of oil production, as well as other economic factors relating to the industry, was to have far - reaching implications for the world economy. One example was the collapse of oil prices in the 1980s, which was to ruin a large number of independent oil refineries and led to a recession in many areas of the world.

Another issue that has impacted the oil industry and which will also be discussed in later sections of this paper are the environmental issues related to the industry and which have a secondary but equally complex and important impact on the world economy. For instance, the oil spill from the Exxon Valdez tanker in 1989 caused extensive damage to ecosystems and alerted environmental authorities to the danger that the oil industry could pose to the environment and, by extension, to the economies of those countries affected.

Today many oil companies have diversified their activities into area such as chemical production. Since the 1990s there has been increased consolidation of oil companies. For example, the largest U.S. oil company, Exxon, has merged with Mobil, creating the ExxonMobil giant. Other mergers included Texaco as ChevronTexaco, British Petroleum with Amoco and ARCO as BP, and Conoco with Phillips Petroleum as ConocoPhillips. ("Oil Industry")

The situation in more recent times has been influenced by political factors such as the end of the Cold War and the demise of the Soviet Union. This has had a negative effect on oil production in the developing countries, mainly due to the fact the loss of material support from the Soviet Union and Communist countries. The decline in the world economy as well as the move towards sources of energy other then oil has consequently resulted in a decline of oil production. ("Oil Industry")

Another factor is the tendency towards privatization in the industry. This is due to the view that, "...state ownership has been labelled a failure and private ownership touted as the only way forward" ("Oil Industry"). All of these factors have meant that there has been a change in the power balance between the large oil companies and the developing or Third World countries, in favor of the oil companies.

Today the top 234 private international oil companies hold only about 5% of the world's crude oil reserves of 1,000 billion barrels. The situation is similar with regard to natural gas, which is widely agreed to be the hydrocarbon fuel of the future because it is less polluting than oil.

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2. Key issues that are related to international economy.

The oil or petroleum industry is related to the petroleum market internationally. In understanding the key issues in international economics and oil one has firstly to understand the importance of oil as an energy source. Oil drives the economies of the world and is related to almost every industry and economic activity. This does not only refer to the need for fuel for transport in modern economies but also to the myriad ways in which oil usage and consumption impacts on particular countries and economies. If one takes into account the contemporary reality of globalization, then the impact of oil becomes more evident.

With increased communications technologies and forms of transport, the era of the isolated economy or country are a thing of the past. On a simplistic level, globalization means that every economy or country is affected by the global economic situation, which is intimately connected to oil. The effect of an increase in the oil price is therefore widespread and invasive and impacts on every country in relation to that countries dependence on oil. This is an aspect that will be discussed in the following sections and it is a cardinal and fundamental factor that needs to be taken into account in terms of the way that the oil industry impacts on the global economy. The importance of oil lies in the fact that it is a vital component of almost all other industries. In fact some commentators claim that it is a vital part of industrialized civilization itself.

The importance of oil for the international economy and industry can be seen for the following figures. In terms of world production oil averaged about 83.02 million barrels per day in 2004 compared to about 74 million barrels per day in 2002. (Some interesting oil industry statistics) This aspect is cardinal in the understanding of the relationship between oil production and contemporary economic factors. This refers essentially to the fact that, "...Consumption is increasing at a faster rate than the increase in production. And at the end of 2005, world demand... exceeded world refinery capacity for the first time - demand of 84 million barrels per day vs. 83.5 million barrels per day refinery capacity" (Some interesting oil industry statistics). This has a number of economic implications internationally.

One commentator compares the modern oil industry to a… READ MORE

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