Petroleum industry

The United States petroleum industry became a major factor in the country’s emergence as the world’s dominant economy and a global superpower during the twentieth century, even as its major corporations were becoming the anchor of the international cartel of petroleum corporations (the Seven Sisters) that dominated the production, refining, and marketing of oil outside the United States and Soviet Union through the half century leading up to 1973.

Civilizations are deeply rooted in their energy sources. When physical labor was the most versatile form of energy, those who controlled large slave populations were able to erect monuments to themselves that still punctuate the landscape in Egypt, Mexico, and Peru. The Industrial Revolution flourished on “King Coal,” and those countries that possessed indigenous coal reserves were able to flourish during the nineteenth century, whereas those without (like the Austrian-Hungarian and Ottoman empires) declined. In the twentieth century, oil’s higher energy value and versatility made it the fossil fuel of choice, and by the century’s end two countries with large domestic petroleum holdings, Russia and the United States, had established themselves as the world’s dominant powers. Along the way, the availability of large amounts of cheap oil and gas reshaped American society and economy into the world’s most affluent.Petroleum industry

The U.S. Industry at Home

Although the first United States oil well was drilled before the U.S. Civil War, in 1859, it was not until John D. Rockefeller, John D.Rockefeller began to assemble the Standard Oil CompanyStandard Oil Company in 1870 that the U.S. petroleum industry–then focusing on the production of kerosene for home lighting–began to develop. Over the next four decades, Rockefeller’s empire not only spread into the mass production of transportation fuels and acquired such industry dominance that it drew antitrust action, but also it established the model for the industry giants that were to follow it: Vertical integrationvertical integration. Thus, although Rockefeller founded his empire by acquiring a monopolistic dominance over petroleum refining operations, by the time that the Supreme Court in 1911 ordered the dismemberment of Standard Oil into its state components, Rockefeller had internally integrated its operation from the production of oil in fields it owned, through refining operations and transportation, and into local sales marketing, as well as research and development activity in the petroleum field.

The breakup of the Standard Oil Company, as intended, created more competition and opportunities for competition in all phases of the industry; however, so dominant had it become that its dismemberment scarcely produced an even playing field. The largest petroleum company in the world at the time of the antitrust action, it was broken up into state units which, in terms of wealth, continued to constitute most of the world’s major oil companies, including Standard Oil of New York (later Mobil), Standard Oil of New Jersey (Jersey Oil, later Exxon), and Standard Oil of California (later Chevron). In fact, the most lasting impact of the action was its effect on the international oil market. State units like Standard Oil of New York and Jersey Oil, which were rooted in refining or marketing operations, were forced to look abroad for their oil supply. There, they quickly developed as among the world’s first multinational corporations and shortly thereafter established themselves as among its dominant multinational corporations.

In the meantime, the entry of the United States into the mechanized arena of World War I underscored the national security importance of a strong petroleum industry, and five years after the forced breakup of Standard Oil, the United States government was encouraging a level of internal cooperation inside the domestic petroleum industry that has never been extended to other U.S. industries. That same importance of oil to national security, and to the affluent way of life of twentieth century Americans, later led Washington to extend a wide range of tax benefits to U.S. corporations seeking oil at home and abroad as the widespread demand for oil continued to grow.

Within the United States, the product of this action was essentially a three-tiered domestic petroleum industry, measured in terms of the level of vertical integration of the units composing it, surrounded by a variety of petroleum-related industries (pipeline companies, natural gas companies, fertilizer plants, and so on) in the country’s economy. At the bottom were the numerous small firms involved in the production of oil. At the next tier were the “independents,” the term generally assigned to the large domestic corporations like Getty Oil and Ashland Oil, which were small only in comparison to the giant United States-based multinationals and most of which were also involved in refining or regional marketing operations. Finally, there were the industry’s “majors,” the giant, often multinational corporations–most notably Mobil, Exxon, Gulf, Texaco, and Standard Oil of California. This industry structure was in place when the 1973 Arab oil embargo of 1973Arab oil embargo made energy policy a priority in oil-consuming countries throughout the world. By then, however, domestic production had not been meeting the growing oil appetite of Americans for more than fifteen years, and the United States economy had become increasingly dependent on imported oil for more than 30 percent of its petroleum and nearly a sixth of its total energy needs.

The American Industry Abroad

The five giant United States petroleum corporations–Mobil, Exxon, Gulf, Texaco, and Standard Oil of California–combined with Royal Dutch-Shell and British Petroleum constituted the Seven Sisters cartelSeven Sisters, the international oil cartel that by the 1930’s was maintaining stability in the global oil market and that as late as 1960 continued to account for approximately 90 percent of all petroleum production and 80 percent of all refining activity outside North America and the Soviet Union. Just as the power of each of these corporations rested on its scale of operations and high internal degree of vertical integration, their power as a cartel rested on their collective cooperation. Producer states either sold to them at the price they offered, or the producer states rarely sold their oil, and the production needs of any Sister unable to gain agreement from its producer government were met by other members of the cartel increasing the production in their fields until the wayward state fell into line.

Oil well derricks on the beach along the California coast in 1944.

(Library of Congress)

Ironically, it was the arrival of other United States oil firms that ultimately led to the downfall of the Seven Sisters cartel. Most of these “independents”–like Occidental in Libya–were dependent on a single country for their overseas supply of oil and were thus often forced to offer their host a higher price for oil than the Sisters were offering their producing countries. Those deals, in turn, usually had to be met by the Seven Sisters and then, to cover the cost, offset by the cartel revising upwardly its earlier established price for oil on the world market. Thus, even before the 1973 oil crisis enabled the Organization of Petroleum Exporting CountriesOrganization of Petroleum Exporting Countries (OPEC) to replace the Seven Sisters as the international cartel controlling oil prices and production, the Sisters’ ability to establish and maintain the international price of oil had already been slipping away.

Subsequently, U.S. and other western oil companies have often become the contracting partners of the oil-producing states, charged with producing their oil in return for a percentage of the value of their production operations. Thus, they have continued to profit, sometimes handsomely, from upward spirals in the cost of OPEC oil. Moreover, although the producing states now frequently engage in their own refining operations and have acquired their own tanker fleets, the United States oil industry and its associated industries have continued to be at the vanguard of the international petroleum business, whether measured in the ability to produce oil in difficult locales, to extinguish fires in the oil fields of Kuwait or on off-shore platforms in the North Sea, or to build a pipeline across the Arctic without damaging the permafrost.

The New Millennium

Throughout their nearly half century of controlling the international price of oil, the Seven Sisters practiced price restraint. Vertically integrated, they made their profits from their refining, transportation, and marketing operations as well as the production of oil, and in each area, their focus was on small unit profits from a very large volume of transactions. They therefore focused on maintaining price stability and avoiding any sudden surge in cost, which would reduce demand. By contrast, the members of the OPEC cartel were initially involved in only the production of oil. Additionally, many were committed to costly development schemes whose financing depended on high earnings from their oil exports. Consequently, when political events like the outbreak of the Iraq-Iranian war in 1979 reduced the exportable supply of petroleum, OPEC states have often pushed the price of their exports ever higher–for example, from $3 per barrel to nearly $12 per barrel in October, 1973, and to over $36 per barrel by the end of the decade. During the 1980’s, that action ignited a global recession that reduced significantly the demand for oil throughout the western world.

The impact of that recession was not confined to OPEC’s exports. Oil exporting states inside the United States also found the demand for their product and its price plummeting, and like other U.S. industries caught in a prolonged recession, America’s petroleum corporations began to retrench their operations and sought better means of functioning efficiently. One result of that search was a significant increase in mergers during the 1980’s, which included such major corporations as Chevron (which acquired Gulf Oil) and Texaco (which purchased Getty Oil).

The recession ended during the 1990’s, but for most of that decade, oil prices remained flat at around $25 per barrel, and the merger boom did not end with the revival of the postrecession demand for oil. In fact, it is estimated that between 1990 and 2004, more than twenty-five hundred mergers occurred that involved either oil companies or industries related to them. Most important, those concentrated during the 1998-1999 period included some of the biggest petroleum corporations in the world, capped by the merger of the two giants from Rockefeller’s old Standard Oil monopoly: Mobil and Exxon.

As a result of these mergers, the United States petroleum industry not only continues to represent three of the ten largest corporations in the United States–Exxon Mobil (number one), Chevron-Texaco (number seven) and Conoco-Phillips (number eight)–but these same corporations also account, respectively, for the second-, seventh-, and ninth-largest corporations in the world, as well as the most profitable (Exxon Mobil). They are also only the tip of the petroleum industry in the American economy, where, nearly a century after the breakup of the Standard Oil monopoly, that industry remains as important a component of the United States economy as ever, just as its product remains deeply intertwined with the country’s way of life.

Further Reading

  • Blair, John M. The Control of Oil. New York: Random House Vintage Books, 1976. A scholarly study focusing on the public’s interest in the political economy of oil, the monopolistic tendencies in the American and international oil industries, and the transformation of those industries following the first oil crisis.
  • Engler, Robert. The Brotherhood of Oil: Energy Policy and the Public Interest. Chicago: University of Chicago Press, 1977. Written after the first energy crisis, Engler’s work examines the fraternal network characterizing the American petroleum industry, the political economy of oil in the last quarter of the twentieth century, and the political and economic power of that industry in a country whose way of life had become dependent on oil’s availability and affordability.
  • Falola, Toyin. The Politics of the Global Oil Industry: An Introduction. Westport, Conn.: Praeger, 2005. Well-titled, Falola’s book provides an update to the work of Blair and Engler, in detailing the global oil industry during the early years of the twenty-first century, with due attention to the violent conflicts still being waged in many countries in order to control it, and the wealth and power it represents.
  • Para, Francisco. Oil Politics: A Modern History of Petroleum. New York: I. B. Tauris, 2004. Examination of the international petroleum industry written by a former secretary general of OPEC, this book is highly recommended for its slightly different perspective as companion reading to the other books in this list.
  • Rutledge, Ian. Addicted to Oil: America’s Relentless Drive for Energy Security. New York: I. P. Tauris, 2006. Insofar as OPEC’s power is heavily rooted in the oil-importing world’s demand for oil and the absence of any short-term energy alternatives, the thirst for oil of its biggest customer explains much of OPEC’s ability to push prices ever higher in the twenty-first century’s first decade.
  • Sampson, Anthony. The Seven Sisters: The Great Oil Companies and the World They Created. Rev. ed. London: Coronet, 1998. Less detailed than Yergin but nonetheless an award-winning portrait of the rise and fall of the cartel that long controlled the international oil industry.
  • Yergin, Daniel. The Prize: The Epic Quest for Oil, Money, and Power. New York: Simon & Schuster, 1991. Epic history of the world of oil, from its birth in the fields of the eastern United States through its growth into a global industry. Particularly interesting are those chapters on Rockefeller’s Standard Oil monopoly, its dismemberment under antitrust action, and the growth of its constituent parts into national and global super-corporations.

Alaska Pipeline

Arab oil embargo of 1973

Automotive industry

Coal industry

Energy crisis of 1979

“Gas wars”

J. Paul Getty

Mineral resources

Organization of Petroleum Exporting Countries

Standard Oil Company

Teapot Dome scandal