If We All Started Driving Priuses, We'd Consume More Energy Than Ever Before
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From 1859, when Colonel Drake discovered oil in Pennsylvania, through 1973, the U.S. was the dominant player in the global energy business. For much of that time, America was both the dominant producer and dominant consumer of oil and gas on the planet.
That dominance extended into technology, finance, transportation, and refining. When it came to developing oil reserves and getting those reserves into the marketplace, the U.S. had no serious rivals. American drill bits, like those made by Hughes Tool Co., bored the holes. American companies, like Gulf Oil, or Standard Oil of New Jersey, did the seismic work, managed the production, built the pipelines, and did the refining. The drilling work was done by companies like Sedco. The drilling technology was developed by outfits like Halliburton. The bridges, or dams, or cities needed to support the cities that were created by the new oil wealth were built by Halliburton's subsidiary Brown & Root, or by American engineering giants like Bechtel. Texas-based law firms like Baker Botts or Vinson & Elkins handled much of the legal work. And all the while, the prolific oil fields in Texas, Oklahoma, and other states allowed the U.S. to effectively set the global price of crude.
Those days are gone.
A half century ago, American-based energy companies pumped about 45 percent of all the oil produced overseas. Today, that percentage is about 10 percent. Out of the top 20 oil-producing companies on the planet, 14 are national oil companies like Saudi Aramco or the National Iranian Oil Company. Furthermore, the national oil companies now control about 77 percent of the world's proven oil reserves. The international oil companies control less than 10 percent.
American energy companies are still big players in the global market, but they are no longer the dominant players. Instead of dictating terms, American energy companies and other international energy companies must now court the national oil companies who sit atop the vast majority of the world's remaining oil and gas deposits. That means that state-controlled outfits like Saudi Aramco, Russia's Gazprom and Venezuela's Petrleos de Venezuela (PDVSA), are, in many cases, able to dictate the rules by which the major oil companies must play.
At the same time that the big oil companies are losing their negotiating strength, rising demand from China, India, and other developing countries is allowing the national oil companies to change their focus. Instead of looking first to export their products to Western consumers, they are looking east.
Long before the rise of OPEC, and years before Saudi Arabia became the key player in the global oil business, the world's most important oil cartel was based in downtown Austin, Texas.
Between the 1930s and the early 1970s, the three members of the Texas Railroad Commission were the most important people in the global oil business. They met once per month to set "allowables" -- the volume of oil that each operator in the state was allowed to produce from his wells that month. The allowables were set to meet current oil demand and not a barrel more. The Texas cartel operated in a straightforward manner. The three commissioners looked at oil inventories. If they were rising, they cut production. If inventories were falling, they allowed production to rise. And because the Railroad Commission controlled the flow of oil from the world's most prolific fields -- the ones in Texas -- the system worked. No other entity was able to control the supply of oil with the discipline and effectiveness of the commission. And by controlling the prices in the burgeoning American market, the Texas cartel effectively determined world prices, too.
By the late 1940s and 1950s, increasing amounts of oil were being discovered in Texas, Venezuela, the Persian Gulf and elsewhere. And those discoveries led to an enormous oversupply of oil production capacity. So the Railroad Commission simply cut the allowable for Texas producers, thereby balancing supply with demand. Even in a potentially glutted market, prices didn't fall. In fact, they rose, giving every producer even bigger profits. As one economist explained it, the system allowed the big American oil companies to "fix their own prices and make them stick." Another study, done in 1949 by the U.S. Senate's Small Business Committee, said the Railroad Commission's system formed "a perfect pattern of monopolistic control over oil production and the distribution thereof and ultimately the price paid by the public."
The Railroad Commission may have been a cartel and it may have had monopolistic control, but it also brought stability to a chaotic market. Without the cartel, oil producers were constantly being whipsawed by prices, going back and forth between boom and bust, between underproduction and overproduction, as prices rose and fell in chaotic patterns. In the absence of the cartel, producers rushed to get as much oil out of the ground as they could in order to profit before the market became even more saturated with oil.
Neighbors with wells tapping into the same field would overproduce oil from their well to assure that "their" oil wasn't pumped out by adjacent landowners. The chaos in the American oil business reached its acme in the early 1930s, shortly after prospectors discovered the giant East Texas oilfield. After several years of legal wrangling at the state and federal level, the Railroad Commission was empowered to impose production limits and "unitize" fields thereby apportioning the underground oil rights to the owners of the land above.
But Texas' dominance of the industry went far beyond legal issues and oil prices. That oil was a strategic weapon during times of war and crisis. Texas oil provided a critical advantage in World War II. The Big Inch and Little Big Inch pipelines, both of which were built in record time during the war, provided huge quantities of fuel to the East Coast and became key elements of the American war effort. (That said, it's worth noting that America's domestic oil production couldn't keep pace with demand during the war. In both 1944 and 1945, at the height of World War II, the U.S. was a net crude importer. The war years are notable for another fact: the last time the U.S. was a net crude exporter was 1943.)
But America's dominance of the global oil business couldn't last forever. And the end of its dominance can be traced to a specific date: March 16, 1972. At the meeting on that day, the three members of the Texas Railroad Commission met and declared "a 100 percent allowable for next month." In other words, the state's oil producers could run their wells at full capacity. Without explicitly saying so, the commissioners had admitted that Texas' oil wells had reached the limits of their productive capacity. The U.S. oil business, which, for four decades, had near-total dominance of the world market, no longer had the ability to supply extra oil to the market, and therefore drive prices down. Without that ability to produce more oil than the market needed, the Railroad Commission's power as a cartel was lost.
Although few people recognized it at the time, the commissioners' move was an inevitable result of the peak in America's overall oil production. In 1970, two years before the Railroad Commission's announcement, U.S. oil production hit its all-time high of 9.6 million barrels of oil per day. And ever since 1970, America's oil production has been in a gradual decline (In 2005, U.S. oil production averaged just 5.1 million barrels per day, its lowest level since 1949.)
The stability and price protection that the U.S. got from the Railroad Commission was only part of America's ability to control the world's oil supply. American oil companies were also protected from OPEC by federal laws, which limited the amount of oil that could be imported into the U.S. In 1959, Congress mandated that no more than 20 percent of America's oil supply could come from foreign producers.
America's independence from foreign oil producers meant that a new organization, the Organization of the Petroleum Exporting Countries -- which was founded in the early 1960s by Saudi Arabia, Iran, Iraq, Kuwait, and Venezuela -- could not control the world's price of oil. Nor could the OPEC members -- who generally had lower production costs than American producers -- gain much market share in the U.S.
One of the biggest backers of the quota on imported oil during the 1960s and 1970s, was a Republican Congressman from Texas named George H.W. Bush. And the language he used to justify the import quotas was remarkably similar to the rhetoric being used by today's advocates for energy independence. For instance, in early 1970, Bush spoke to an oil industry group in Beaumont, Texas, telling them that he was introducing legislation that would protect them from foreign oil. Bush's legislation was designed to further reduce the amount of foreign oil that could be imported into the U.S. to 12 percent of total demand -- a decrease from the 20 percent limit that was being enforced at the time. Bush told the group that imposing the quota would stimulate oil and gas drilling in Texas and make the U.S. less dependent on foreign oil. "This is particularly true now," he told them, "when instability in the Middle East severely threatens sources of our petroleum imports from that region of the world."
But neither the protectionist strategies advocated by Bush nor the Railroad Commission's pricing power would last. America's increasing oil consumption and declining oil production assured that. In April 1973, the import quota on foreign oil ended. And just six months after that, America was hit by the biggest energy crisis in its history, the Arab Oil Embargo.