History of oil – The rise of Saudi Arabia

saudi oil
Dammam No. 7, the first commercial well in Saudi Arabia, struck oil in 1938. (Photo: Wikipedia)

John D. Rockefeller profited vastly from the age of oil based on the illuminant powers of kerosene. But Thomas Edison found an even better way to provide lighting, needing oil’s backers to find a new use for the fuel. It was ideal timing for the newly perfected motor car, though no one person can claim credit for the invention. Across late 19th century Europe, several manufacturers and scientists were experimenting with internal combustion engines, notably Karl Benz, Gottlieb Daimler and Rudolf Diesel. The first true car was a 1901 Mercedes designed by Daimler’s assistant Wilhelm Maybach but early vehicles were a rare extravagance.

Henry Ford’s Model T (1908) was the game-changer, the epitome of Ford’s standardised production line. Customers could have them in what colour they liked, as long as it was black and by 1914 Ford had sold one million vehicles. Despite the war in Europe, that figure doubled by 1916 and ballooned to 10 million by 1924. As Ford evolved his production processes, he passed on the cost reductions to his customers, while continuing to pay his staff well, ensuring a quality product always left the factory gates.

Ford’s enlightened generosity was unique but his business genius was matched by Alfred Sloan, head of rival General Motors. Sloan saw that 1920s customers weren’t happy with the same black car year after year. Optimistic times called for more diversified products. Sloan brought in a new model each year and he insisted his brands – Pontiac, Buick, Oldsmobile and Cadillac – were responsible for their own profit and loss. By 1927 Sloan and Ford were producing four out of every five cars in the world transforming oil from a source of illumination into a source of power.

Winston Churchill was among the first to realise the profound implications of oil-based transport. Britain had a natural advantage with coal, but in 1913 Churchill as First Lord of the Admiralty, successfully convinced his navy to switch from coal to oil. Though it meant Britain was going to have to import more oil, it was necessary to keep ahead of German naval developments. To ensure continued British energy self-sufficiency, Churchill insisted on government takeover of the bankrupt Anglo-Persian Oil Company (now BP) to manage the oil concession in Persia. The ensuing First World War merely cemented the notion that ample access to oil was crucial in mass mobilisation of military forces.

But there was already alarm about peak oil. By 1919, demand outstripped supply of American oil while supplies from Russia were almost wiped out by the Bolshevik Revolution. A sick president Wilson gave his reluctant blessing to the Sykes-Picot agreement which divvied up the Middle East between Britain and France. Britain carved out its Mesopotamian oil concessions at the 1920 San Remo conference, though Iraqi revolts in Nasiriya and Fallujah would damage western interests (not for the last time).

A puppet regime in Iraq was sworn to London under an alliance treaty. The US objected to British control over Iraqi oil and finally extracted an agreement in 1927 that involved BP, Shell, Total and Exxon-Mobil to jointly manage the concession. Similar situations emerged in the growing oil industries of Mexico and Venezuela leaving most of the world’s oil controlled by the emerging seven sisters. That only left the initially unpromisingly Arabian Peninsula in play.

London was the semi-colonial power of this forbidding desert of shifting sheikdoms. It wasn’t until New Zealand mining engineer Frank Holmes arrived in the mid-1920s that its oil potential began to be explored. Holmes was constrained by financial problems and eventually sold his concessions to Gulf and Chevron. Another key early player was John Philby (father of Soviet spy Kim) who formed an alliance with the House of Saud, who in 1925 had finally defeated the British-supported emir Hussein for control of the peninsula. King Abdul Aziz ibn-Saud’s success was based on a power-sharing pact with a 18th century puritanical doctrine of Islam called Wahhabism, but his need for money saw him eventually take the advice of Philby. He signed an oil contract with Chevron in 1933 for the whole of the eastern al-Hasa province.

Drilling in the peninsula was a dangerous undertaking and Chevron brought Texaco in as half partners to spread the risk. Together they formed a new company called Caltex. By the 1930s there was a new oil glut thanks to advances in geophysics, seismic subsurface analysis and secondary recovery methods using injected natural gas. Soviet production had recovered from the revolution and Middle Eastern oil was coming on-stream. Gasoline stations emerged to fill an exploding American domestic market for oil, along with motels and drive-ins.

With the threat of another price war, the global companies got together at Achnacarry Castle, Scotland in 1928 to form the first ever global oil cartel. The deal committed each company to freeze the status quo by fixing sales and tying pro-quota increases to consumption growth. The Gulf-Plus system fixed the cheaper world oil price to the more expensive American price with phantom freight charges. But the Wall St crash submerged the market with a huge oil glut; a situation finally rescued by the Roosevelt administration’s federal quotas. Thanks to Texas’s leadership in oil production, the Texas Railroad Commission became the de facto setter of world prices by deciding when to switch on and off its taps, a situation that lasted until 1971 (The group that eventually took over the Railroad’s role, OPEC, learned well from the Texan model).

Despite oil’s growing importance as a global fuel, it still lagged well behind coal at the outbreak of the Second World War by a production factor of four to one. America produced 60% of the world’s oil and the search for new oil was a critical factor in the strategy of that war. The Baku oilfields were more important to Hitler than taking freezing Moscow. Japan was less interested in Australia than in the oil in Borneo and Sumatra, and Allies planes spent far more time destroying the Ploiesti refineries in Romania than it did bombing Nazi death camps. By the end of the war it was clear to all strategists no war could be won without clear and ample supply of crude oil.

In America, Secretary of the Interior Harold Ickes warned President Roosevelt of the steady decline in the ratio between US oil reserves and production. The government kept the price of oil low to aid the war effort but this had the side impact of discouraging exploration. Ickes convinced the president to initiate an oil alliance with Saudi Arabia, which was now known to have huge deposits. Caltex were already there and looking for military protection in case of a German attack. In 1941, the US charged their Egyptian embassy to look after Arabian affairs and by 1943 the peninsula was recognised as vital to American “defence”, receiving Lend Lease support.

In 1945 the new relationship was cemented when Roosevelt met ibn-Saud on the USS Quincy in the Suez Canal. With the start of the Cold War, America became a net importer of oil for the first time and oil policy was at the heart of the Marshall Plan, which set a doubling of European consumption by 1951. Exxon and Mobil joined Chevron and Texaco’s Arabian venture to form the Arabian American Oil Company, Aramco. Mobil took 10% while the three other partners took 30% and Mobil’s lack of boldness cost it dear when it became apparent Arabia’s Ghawar was the largest oilfield on the planet. The companies settled in with a “fifty fifty profit sharing” partnership with ibn-Saud and by 1949, there was a pipeline in place from Arabia to the Lebanese port of Sidon. Arabian oil was about to power the world, and the American oil companies and the Saudi royal family were the biggest winners.

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