Dominant energies and the devices and machines used to convert them into heat and kinetic energy have left deep, and specific, imprints on society. The age of biomass energy relied on wood, charcoal and crop residues (known as biomass fuels) that were not always actually renewable as demand for heating and metal smelting often led to extensive deforestation and the overuse of crop residues. Small waterwheels and windmills powered by water and wind had a marginal role as human and animal muscles energized most tasks. The coal age introduced fuels that were more energy dense than wood, were available in highly concentrated deposits and in prodigious amounts from a relatively small number of mines, and could economically power steam engines. These were the first inexpensive mechanical prime movers that not only replaced many stationary tasks that had previously been performed by animal and human power, but also turned old dreams of rapid land and ocean travel into inexpensive realities.
The introduction and diffusion of refined oil products (gasoline, kerosene, diesel fuel, fuel oil) marked an even more important qualitative shift in modern energy consumption. New fuels were superior to coal in every respect: they had higher heat content (releasing more energy per unit mass when burned), were easier and safer to produce, cleaner and more convenient to burn and offered an incomparable flexibility of final uses.
Crude oil, or more accurately a variety of refined oil products derived from it, has changed the very tempo of modern life. By allowing the introduction of more efficient prime movers they increased the productivity of modern economies and they accelerated, as well as deepened, the process of economic globalization. Their extraction and sales have fundamentally changed the economic fortunes of many countries, and they have also improved some aspects of environmental quality and added immensely to private and public comfort. The nominal price paid for these benefits – the cost of finding crude oil, extracting it, refining it and bringing the products to the market – has been, so far, relatively affordable for all but the poorest of the world’s economies.
The history of the oil business and of the price for crude oil paid by consumers are matters of rich documentary and statistical record and I will briefly recount major events, shifts and trends. But the prices that countries and companies pay for importing crude oil and the prices consumers pay when buying refined oil products (directly as automotive fuels and lubricants, indirectly as fuels for public and freight transport and for energy embedded in the production of virtually anything sold today) tell us little about the cost of finding and producing oil, and they are obviously very different from the real cost that modern societies have paid for oil in terms of (what economists so coyly call) the externalities of its extraction, transportation, processing and combustion, as well for ensuring the security of its supply.
That is why in the closing section of this chapter I will describe some of the broader costs of oil’s benefits: the environmental consequences of energizing modern economies with liquid fuels ranging from marine oil pollution and photochemical smog to the combustion of refined products as major contributors of anthropogenic greenhouse gases; the economic, political and social impacts of both owning, and so frequently mismanaging, rich oil resources on the one hand and of being forced to buy them at what often amounts to extortionate prices on the other; and the political, military and strategic designs, calculations and decisions aimed at securing a steady flow of crude oil from the major producing regions and the wider repercussions of these activities.
What we have accomplished with oil
The beginnings of the oil era were not all that revolutionary: they started with a single product limited to just one major market as kerosene refined from crude oil became a major illuminant during the late 1860s and the 1870s. But it was not the only source of light, as city gas, made from coal, had been making great inroads in urban areas and soon afterwards both kerosene and gas were displaced by electricity. And neither the lightest nor the heaviest liquid fractions of crude oil were of much use in the early decades of the oil industry: gasoline was an inconvenient by-product of kerosene refining, too volatile and too flammable to be used for household lighting or heating, and there were no suitable small furnaces that could burn heavy oil for space heating. At least oil-derived lubricants offered cheaper and better alternatives to natural oils and waxes.
Only the invention of internal combustion engines (gasoline ones during the 1880s and the diesel engine during the 1890s) made oil’s lighter fractions potentially valuable but they became indispensable only two decades later, and then only in North America, with the emergence of large-scale car ownership and the diffusion of trucking (elsewhere the conversion from railroad to highway transport and the rise of car ownership began only after World War II). Less than two decades after the first motorized vehicles came the use of gasoline-powered reciprocating engines in flight and, within a generation after this fundamental breakthrough, the emergence of commercial aviation after World War I. During the 1950s this new business was revolutionized by the introduction of gas turbines. These superior internal combustion engines made long-distance flight affordable.
Refined fuels powering massive diesel engines also changed both freight and passenger waterborne transport: all ships that were previously fueled by coal, from river barges to trans-oceanic liners, and from fishing vessels to large container ships (whose introduction made marine shipping a key tool of globalization) have benefited from the cleaner, cheaper, faster, more powerful and more reliable manner of propulsion. Small gasoline-powered outboard engines created a new leisure activity in motorized boating. Freight and passenger trains benefited from diesel engines, as did numerous heavy-duty trucks and construction and off-road vehicles.
Obviously, refined oil products have had their most far-reaching impact in transportation and I will note the key technical milestones of these advances and describe the current fuel requirements of these activities. The automobile was a European invention and its mechanical beginnings go back to 1876 when Nikolaus Otto (see figure 1) built the first four-stroke cycle engine running on coal gas. The first light, high-speed, gasoline-powered, single-cylinder vertical engine using Otto’s four-stroke cycle was designed by Gottlieb Daimler and Wilhelm Maybach in 1885, and in the same year Karl Benz built the world’s first motorized carriage powered by his slower horizontal gasoline engine. After a major redesign by Emile Levassor in 1891 the standard car configuration was virtually complete by the mid-1890s: the combination of four-stroke gasoline-fueled engine, electrical ignition and a carburetor launched the largest manufacturing industry in history whose expansion still continues.
An entirely different mode of fuel ignition was patented by Rudolf Diesel in 1892 (see figure 1). Fuel injected into the cylinder of diesel engines is ignited spontaneously by high temperatures generated by compressing the fuel twice as much as it is compressed in Otto’s engines. Diesel engines work at a higher pressure and lower speed, and large stationary machines have best efficiencies just above 50% and automotive engines can approach 40%. Gasoline engines used to be 20–30% less efficient but their best new designs have almost closed the gap. Diesel fuel has other advantages: it contains about 11% more energy than gasoline in the same volume, it is slightly cheaper than gasoline and it is not dangerously flammable. Low flammability makes diesel engines particularly suitable in any setting where a fire could be an instant disaster (such as on board ships) as well as in the tropics where high temperatures will cause little evaporation from vehicle and ship tanks. And the combination of high engine efficiency, higher volumetric energy density and low fuel volatility means that diesel-powered vehicles can go farther without refueling than equally sized gasoline engines. Additional mechanical advantages include the diesel engine’s high torque, its resistance to stalling when the speed drops, and its inherent ruggedness.
Figure 1 Creators of the automobile age (clockwise): Nikolaus Otto, Karl Benz, Gottlieb Daimler and Rudolf Diesel
But early diesel engines were simply too heavy to be used in automobiles, and gasoline-fueled machines were not an instant success either: for more than a decade after Levassor’s redesign (and also after Charles Duryea built the first American gasoline-fueled car in 1892) cars remained expensive, unreliable machines bought by small numbers of privileged experimenters. This changed only with Henry Ford’s introduction of the affordable and reliable Model T in 1908 and with the expansion and perfection of mass production techniques after World War I. Greater affordability combined with higher disposable incomes alongside technical advances in car design and better automotive fuels led to an inexorable rise in car use, first in the US, and then after 1950 in Europe and Japan, and now throughout much of continental Asia.
The combination of America’s affluence and perfected mass production gave the country a more than 90% share of the world’s automotive fleet during the late 1930s, but the post-WWII economic recovery in Europe and Japan began to lower this share. In 1960, the US still had 60% of the world’s passenger cars, but by 1983 Europe matched the US total and the continent is now the world’s largest market for new vehicles while China became the fastest growing new car market during the 1990s. In 2015 worldwide passenger car registrations surpassed 900 million (see figure 2) and there were also about 350 million trucks, buses and cars in commercial fleets making a total of 1.25 billion road vehicles. Because the typical performance of their engines remains rather inefficient their claim on refined fuels remains high.
Any brief recital of the key economic, social and behavioral impacts of global car use must include, on the positive side of the ledger, unprecedented freedom of travel, expansion of individual horizons, flexibility and convenience, and the enormous contribution to the prosperity of modern economies where car building is commonly the single largest industry (in terms of added value) and where activities associated with the ownership and driving of cars create a large share of gross domestic product. The two lead items on the negative side are a large death and injury toll (worldwide, about 1.2 million deaths every year, and some twenty million injuries to drivers, passengers and pedestrians) and various environmental impacts. Traffic jams, now nearly chronic in most large urban areas, loss of land (often prime farmland) to highways and parking lots and the destruction of traditional urban patterns are other common negatives.
Figure 2 Worldwide car ownership, 1900–2015
GASOLINE CONSUMPTION BY CARS
Thermal efficiency of the best gasoline-fueled engines in passenger cars is now over 30% and in 2014 Toyota developed an engine (using the Atkinson cycle) with maximum efficiency of 38%, but engines in everyday use achieve no more than 25%. Frictional losses cut the overall efficiency by about 20%, and partial load factors (inevitable during the urban driving that makes up most car travel time) reduce this by another 25%; accessory loss and (increasingly common) automatic transmission may nearly halve the remaining total so that the effective efficiency can be as low as 7–8%. Besides, for most of their history cars have not been designed to minimize gasoline consumption, and this has been particularly the case in the world’s most important car market: America’s preference for large cars, decades of low gasoline prices and heavy Detroit designs led to the declining performance of the post-WWII US car fleet.
In 1974 specific gasoline consumption (expressed in Europe in liters per 100km) actually increased by about 15% in comparison with the machines from the 1930s; the US uses a reverse measure of performance, miles per gallon (mpg), and hence this rate declined between the mid-1930s and 1974. Only OPEC’s oil price increases brought a rapid turnaround as new federal rules (known as CAFE, Corporate Automotive Fuel Efficiency) specified gradually improving performance: the average was doubled in just twelve years, from 13.5mpg in 1974 to 27.5mpg (8.6 l/100km) by 1985. Expanding imports of more efficient European and Japanese cars further improved the overall performance. Unfortunately, the collapse of high oil prices in 1985 and then the economic vigor of the 1990s ended this desirable trend and CAFE remained stuck at 27.5mpg for the next 25 years, a huge loss of opportunity to make cars more efficient. Moreover, as pick-ups, vans and SUVs (sport utility vehicles: a monumental misnomer), all used primarily as passenger cars yet all exempt from CAFE standards, gained nearly half of the US car market, they dragged average fleet efficiency backwards.
The specific performance of these excessively large and powerful vehicles used to be mostly below 20mpg (above 11.8 l/100km), and some 2017 SUV models are even consuming more than 16 l/100km: Chevrolet’s Suburban and Tahoe, and GMC’s Yukon are in this monster category. Moreover, the stagnating efficiency was accompanied by a steady increase in average distance traveled per year: that rate barely moved between 1950 and 1975 (up by just 3% to 15,400km/vehicle) but by 2005 it had risen by more than a quarter to reach nearly 20,000km. As a result, average performance of all US light vehicles was still only 20mpg in the year 2000 and 21.5mpg ten years later. Then the average performance began, finally, to improve: by 2015 the mean had reached the record level of 24.8mpg and a number of bestselling cars could do better than 30mpg: the Honda Civic delivered 33mpg in combined city/highway cycle and 37mpg in highway driving, requiring just 6.35 l/100km.
Hybrid vehicles are, of course, much more efficient: the Ford Focus and Chevrolet Volt are just above 100mpg, requiring just 2.2 l/100km. And the combination of three trends – rising CAFE standards (by 2025 EPA stickers should be 43mpg for small vehicles and 37mpg for light trucks), further market inroads by popular hybrids, and a growing acceptance of electric vehicles – makes it very likely that even with slightly increasing car and truck fleets the US automotive gasoline demand may have already come close to its all-time peak (in 2016 it was just 0.1% above the previous record level set in 2007).
In 2016 motor and aviation gasoline accounted for a third of global refinery throughput. The US share of global gasoline consumption was about 41% of the total, or more than 1,200kg/capita: the country now consumes more gasoline than the combined total for the EU, Japan, China and India. The EU, with a population more than 50% larger than the US and with car ownership nearly as high as in the US, consumed only about 13% of the world’s gasoline (about 160kg/capita). The key factors explaining this difference are the EU’s higher number of diesel engines, smaller and more efficient gasoline-fueled vehicles, and much shorter average annual distances traveled by car (about half of the US mean). Japan consumed about 4% of the world’s gasoline supply in 2015; China, with a population ten times larger than that of Japan, 10% (still only about 70kg/capita); and India claimed just 2%. These comparisons indicate the enormous potential demand for motor gasoline as car ownership increases in Asia’s two most populous economies. They also make it clear that only major shifts in vehicle fleets (more efficiency, more hybrids and more electrics) will prevent this expansion from causing further serious deterioration of air quality.
The diesel engine has changed the world no less than its lighter but less efficient gasoline-powered counterpart. High weight/power ratio had delayed the use of diesels in passenger cars until after World War II but by the 1930s they were well on their way to dominating all applications where their higher mass made little difference, that is, in shipping, on railways, in freight road transport and in agriculture.
Just before World War II, one out of every four cargo ships was powered by diesel engines. Conversion to diesel accelerated after 1950 and today about nine out of ten freight ships are propelled by them, including the world’s largest crude oil tankers and container vessels whose incessant traffic is the principal link between the producers and markets of the global manufacturing economy. The largest ships now have capacities closely approaching 200,000 deadweight tons (dwt, the weight of cargo plus ship’s stores and bunkers and the fuel taken on board to power engines) and are able to carry more than 20,000 stacked containers at speeds exceeding 30km/h. Finnish Wärtsilä and Germany’s Maschinenfabrik Augsburg-Nürnberg (MAN) are the leading designers of large marine diesels and Japan’s Diesel United and South Korea’s Hyundai are their leading producers.
Combustion of diesel oil has multiplied the energy efficiency of railway transport as the replacement of coal-fired steam locomotives by diesel engines boosted the typical conversion efficiency from less than 10% to at least 35%. Trunk rail lines everywhere are now either electrified or use diesel-powered traction.
Diesels began to replace gasoline-fueled vehicles in heavy road transport in 1924 when the first direct-injection diesel engine was made and when MAN and Benz and Daimler (two years before their merger) began to make diesel-powered trucks. By the late 1930s most of the new trucks and buses built in Europe were powered by diesel engines, and after World War II this dominance was extended to every continent. Diesels also power heavy-duty machines used in construction and surface mining, a variety of off-road vehicles (including trucks used in seismic exploration for oil), as well as those quintessential machines of modern land warfare, main battle tanks (although the US Abrams M1/A1 is powered by a gas turbine).
In 1926 Daimler Benz began to develop a diesel engine for passenger cars; their first model, a heavy saloon car introduced in 1936, became a favorite taxicab. Lighter, and also less polluting diesel engines were developed after 1950: consequently, the diesel engines in today’s passenger cars are only slightly heavier than their gasoline-fueled counterparts and they should meet strict air quality standards. Although passenger diesels are still rare in North America (just 3% of new vehicles in the US), in Western Europe (with more expensive gasoline) diesel cars have accounted for slightly more than 50% of the new car market since 2006 (and in Ireland more than 70% since 2012).
A light gasoline-powered four-cylinder internal combustion engine built by the Wright brothers also powered the first flights of a heavier-than-air machine that took place at Kill Devil Hills, North Carolina, on December 17, 1903, after Wilbur and Orville solved the key challenges of balance and control and proper wing design by building a series of experimental gliders. Military planes powered by high-performance reciprocating engines saw plenty of action during the closing years of World War I and commercial flight began during the early 1920s, less than two decades after the Wrights’ pioneering lift-off; by the late 1930s multi-motor hydroplanes were crossing the Pacific in stages. The performance of reciprocating aviation engines continued to improve until the late 1940s but their limits were clear: they had relatively high weight/power ratios; their action subjected the aeroplanes to constant vibration; they could not develop speeds in excess of 600km/h; and they could not sustain flight at high altitudes, above the often violent weather.
Prospects for long-distance commercial aviation changed fundamentally with the invention of jet engines and with their rapid adoption by airlines. Although the adjective is misleading, because the machines can burn both liquid and gaseous fuels, the proper technical name for jet engines burning kerosene is gas turbines. They are, much like the engines that power land vehicles, trains and ships, internal combustion engines but they differ from Otto and diesel engines in three fundamental ways. In jet engines the compression of air precedes the addition of fuel in a combustor, the combustion goes on continuously rather than intermittently, and the energy of the hot air flow is extracted by a turbine that is connected to the compressor by a shaft. Gas turbines first compress the air (up to 40 times above the atmospheric level) before forcing it through the combustion chamber where its temperature more than doubles. Part of the energy of the hot gas rotates the turbine and the rest generates forward thrust by exiting through the exhaust nozzle.
GAS TURBINES IN FLIGHT
The construction of the first viable jet engine prototypes was a notable case of independent parallel invention as Frank Whittle in the UK and Hans Joachim Pabst von Ohain in Germany designed the first practical engines during the late 1930s. Von Ohain’s version was first tested on August 27, 1939 in an experimental Heinkel-178, and Whittle’s engine powered the experimental Gloster on May 15, 1941. Improved versions of these engines entered WWII service too late (in July 1944) to make any difference to the outcome of the war.
Most of the great innovative military jet engine designs – driven by demands for ever higher speeds, altitudes and maneuverability – originated in the US and the USSR, but the British de Havilland Comet, powered by four de Havilland Ghost engines, became the first passenger jet to enter scheduled service, between London and Johannesburg, on May 5, 1952.
With a top speed of 640km/h the Comet was twice as fast as the best commercial propeller aeroplanes but it carried only thirty-six passengers and its engines had a very low thrust making it prone to loss of acceleration during take-off. But these drawbacks were not the reasons for the plane’s catastrophic end. After three Comets disintegrated in the air between 1953 and 1954, all Comet flights were suspended and the fatal accidents were traced to the fatigue and subsequent rupture of the pressurized fuselage. When a completely redesigned Comet 4 began flying in October 1958, two other turbojets were in regular service, the Soviet Tupolev Tu-104 and the Boeing 707. The 707 was the first in a long line of the most successful commercial jet aircraft that includes the 737 (the bestselling jetliner in history) and the jumbo 747, the first wide-body jet (in scheduled service since January 1970). This enormous plane (maximum take-off weight of nearly 400t) was made possible by the development of turbofan engines.
By changing the gas compression and adding extra fans ahead of the compressor, two streams of exhaust gas are created – high-speed core exhaust which is enveloped by a volume of slower by-pass air; this reduces noise and produces a higher thrust. In the latest engine designs more than 90% of air compressed by an engine bypasses its combustion chamber, reducing both fuel consumption and engine noise. While turbojets reach their peak thrust at the very high speeds needed for fighter planes, turbofans do so at low speeds, a great advantage in making heavy planes airborne. The rapid post-1970 worldwide expansion of commercial flying would have been impossible without the low fuel consumption and very high reliability of turbofans (see figure 3). The engines are now so reliable that two-engine aircraft can be used even on the longest intercontinental routes on flights lasting seventeen hours.
Specific jet fuel (Jet A and Jet A-1) consumption (usually measured per passenger-kilometer) has been steadily, and impressively, decreasing, and the new Boeing 787 (Dreamliner) is nearly 70% more efficient than the company’s pioneering 707 turbojet, whose commercial service began in 1958. Still, fuel consumption on long-distance flights is high: kerosene is 47% of the take-off weight of the Boeing 777–200LR, currently the passenger aeroplane with the longest-range; on a trans-oceanic flight nearly 45% (about 175t) of a Boeing 747 is kerosene and at cruising altitude (typically 10–12km above sea level) the aircraft’s four engines consume about 3.2kg (roughly 4l) of the fuel every second. And absolute worldwide kerosene consumption has been rising steadily because air travel has seen the highest growth rate among all transportation modes. The annual total of passenger-km flown globally by scheduled airlines surpassed 40 billion in the early 1950s, and after doubling (on the average) in less than every six years, it reached nearly 3 trillion in the year 2000, and it surpassed 6 trillion in 2014 (see figure 3). In terms of passengers carried annually, the total rose from 320 million in 1970 to 3.4 billion by 2015. In 2015 the total mass of jet fuel consumed in commercial aviation was equal to only about 12% of the total of gasoline consumed by road vehicles, and jet fuel was less than 3% of worldwide refinery output, and in the US it was about 6% of total.
Nearly two-thirds of the world’s refined products are now used in transportation (roughly 2.5Gt in 2005) and in the US that share is now more than 75%. Transportation’s dependence on liquid fuels is even higher: in 2015 about 93% of all energy used by road vehicles, trains, ships and planes came from crude oil. Yet it can be argued that the most profound transformation effected by liquid fuels was the massive, and in affluent countries now pervasive, mechanization of agricultural tasks, a grand transformation of the most important economic activity that has been driven by a fundamental change of prime movers.
Figure 3 Exponential increase in total passenger-kilometers flown annually by scheduled airlines, 1920–2015
All pre-industrial agricultures (regardless of their particular organization or average productivity) were energized solely by solar radiation whose photosynthetic conversion produced food for people, feed for animals and organic wastes whose recycling replenished soil fertility. But this renewability did not translate into a reliable supply of food. Poor agronomic practices, low yields and natural catastrophes brought recurrent food shortages, and higher yields required more human and animal labor.
All traditional agricultures were highly labor-intensive, commonly employing in excess of 80% of all available labor. Horse-drawn machines (gang ploughs, binders, harvesters and combines) gradually began to reduce this share during the nineteenth century, but the most precipitous drop came with the adoption of tractors and self-propelled agricultural machinery. The proportion of the US labor force in agriculture declined from nearly 40% in 1900 to less than 5% by 1970 and it is now only 1.5%, and similar rates of decline (albeit not to such a low share) have been recorded in all Western countries. The four universal measures that revolutionized traditional agriculture are the mechanization of field and crop processing tasks energized by engines and motors; the use of inorganic fertilizers, above all of synthetic nitrogen compounds; applications of agrochemicals to combat pests and weeds; and the development of new high-yielding crop varieties.
As a result, modern farming has become dependent on large-scale energy subsidies, both in terms of liquid fuels for field, irrigation and crop processing machinery and also as energy embodied in the synthesis of fertilizers, pesticides and herbicides. Productivity gains resulting from this transformation have been stunning as yields rose (tripling for many common crops during the twentieth century) and labor needs were cut. In 1900 American farmers needed an average of about three minutes’ labor to produce 1kg of wheat, but by the year 2000 the time was down to just two seconds and the best producers now do it in one second. The price of this progress is that, as Howard Odum aptly put it, we are now eating potatoes partially made of oil.
Agricultural mechanization was made possible above all by the use of tractors, machines first introduced in significant numbers in the US just before World War I. The power capacity of gasoline-fueled tractors surpassed that of US draft horses before 1930, but in Europe the switch from animate to machine power took place only after World War II and it relied mostly on diesel engines that were introduced during the 1930s. Diesel engines also enabled the post-1950 shift to heavy four-wheel drive machines in the US and Canada (where the largest machines now rate about 400kW, or 550hp) as well as the designs of heavy caterpillar tractors. In contrast, Asia’s agricultural mechanization has relied on small hand-guided two-wheel tractors (both gasoline and diesel powered) appropriate for small rice fields.
Diesel engines are also used in a variety of harvesting machinery, including self-propelled combines and cotton pickers. Stationary diesel engines of different sizes are also used to generate electricity, either in locations far from centralized electrical supply or in emergency situations, with the largest units as large as medium-sized steam turbines. Smaller engines are used to provide mechanical energy for refrigeration and crop processing. Given the magnitude of other final markets, agriculture (with forestry) makes a relatively small claim on refined products, amounting globally to less than 3% of the total.
Fuel oil was the first convenient substitute for solid fuels (coal and wood) whose combustion required repeated stoking and close supervision. After they bought small, automatically fed oil furnaces, millions of families, first in the US and Canada, later in Japan and Europe, could enjoy, for the first time, untended heat available at a flick of a switch or the setting of a thermostat. The small size of storage tanks means that delivery trucks must refill them four or even five times during a cold winter when high demand may force prices to spike. The worldwide switch to natural gas has reduced the number of families using fuel oil for space heating. In 2016 fewer than 5% of US households (about 6 million, about 90% of them in the Northeast) still relied on fuel oil compared to nearly a third in 1972, and this small share will soon be eliminated by abundant supply of natural gas produced by hydraulic fracturing of shales, a process to be explained in some detail later in this book. Worldwide, about 8% of all refined fuels were consumed by the residential and commercial sectors in 2015, overwhelmingly for heating; again, this share will continue to decline as natural gas takes over.
Besides supplying the most important liquid fuels of modern civilization the process of crude oil refining is also a source of key petrochemical feedstocks that are further processed into an enormous variety of synthetic materials. In 2015 about 11% of all hydrocarbon liquids (more than 400Mt) were used as petrochemical feedstocks, with naphtha accounting for about two-thirds of that total, followed by liquefied petroleum gases (LPG).
PETROCHEMICAL FEEDSTOCKS AND PLASTICS
There are two major kinds of these feedstocks, olefins (mainly ethylene and propylene) and aromatics (mainly benzene, toluene and xylene). Ethylene, produced by steam cracking of ethane or naphtha, is the most important petrochemical feedstock: the EU annually produces about 20Mt, the US about 40Mt. Propylene is the second most important feedstock and naphtha cracking also yields butadiene. Polymerization of basic feedstocks produces the now ubiquitous thermoplastics that account for more than 70% of all man-made polymers. Thermoplastics are made up of linear or branched molecules that are softened by heating but harden again when cooled.
Polyethylene is the most important thermoplastic, most commonly encountered as a thin but strong film made into garbage, grocery and bread bags, while its common hidden uses range from insulation of electrical cables to artificial hip joints. The material is also spun into fibers and blow-molded into rigid containers for milk, detergents and motor oil, into gas tanks, pipes, toys and a multitude of industrial components.
PVC (polyvinyl chloride) is even more ubiquitous than polyethylene, found everywhere from buried pipes to credit cards, from floor tiles to surgical gloves.
Polypropylene is found in fabrics, upholstery and carpets. Propylene is also a starting material for such plastics as polycarbonates (in optical lenses, windows, rigid transparent covers and, when metallized, in CDs) and polyester resins.
Benzene is used in the synthesis of styrene (as polystyrene in packaging) and as a feedstock for a large number of other chemical reactions. Polyurethanes are a major end product of toluene and xylene is used in making polyester, solvents and films.
The second most voluminous non-fuel use of a refined petroleum product is asphalt. Asphalting of roads and sidewalks began sporadically in the US during the 1870s. New York City switched from brick, granite, and wood block paving to asphalt in 1896, and all of these early pavements were made with natural asphalt from Trinidad or Venezuela. Post-WWI car use increased demand for better pavings and the growth of the refining industry supplied hot mix asphalt derived from crude oil. The American experience, expanded after World War II with the building of the interstate highways, has since been repeated in all Western nations, and massive road building is now underway in China and in India, with concrete – a mixture of cement, water and aggregates – as the principal paving material.
But asphalt is easier to maintain: as long as the road foundations are sound the asphalt covering can be stripped and recycled. Indeed, asphalt, not aluminum cans or newspapers, is the most massively recycled material in affluent countries. In 2015 refineries worldwide produced nearly 90Mt of bitumen (a quarter of that in North America) and 85% of that output was used for paving to produce hot and warm asphalt mixes. In the US about 90% of the 70Mt of asphalt removed from worn surfaces in 2015 was reclaimed and reused in new hot and warm mix asphalt production. Asphalt is also used in roofing, industrial coatings, adhesives and in batteries.
Oil business and oil prices
In the past, multinational oil companies were seen as (and at times they actually were) prime practitioners of secretive, collusive, price-fixing deals. And even long after the pricing of oil slipped from their powers, they were still seen as manipulative and hardly trustworthy. When OPEC appeared to be in control of world oil prices, its national companies used to be viewed with even more distrust: whenever oil price spiked they were subject to unending references to how they were ‘having us all over a barrel’. But things have changed and as recurrent rounds of major price declines have demonstrated the limits of OPEC’s power, many commentators were quick to write the organization’s (highly premature) obituaries. The realities have always been more complex. Since the early 1970s the oil business has been subject to a series of major fluctuations, with ups and downs beyond anybody’s predictive powers, with troughs so deep that entire oilfields were shut down upon discovery and crests so high that surpluses and net profits broke all records.
During the 1970s and the early 1980s, major uncertainties were created by the lack of reliable information about remaining reserves, questions regarding the future revaluation of past discoveries and the near-panic concerns about any future moves by the seemingly omnipotent OPEC. The post-1985 retreat of crude oil prices eased such worries, and as relatively low prices fluctuated within a narrow range for the next fifteen years a welcome calm prevailed. In the early years of the twenty-first century, three new concerns converged to reignite the fears about the security of future oil supplies and crude oil prices. The declining rate of new oil discoveries, particularly as far as the new giant oilfields were concerned, misleadingly authoritative claims by some oil geologists (and by many so-called energy experts) about the imminent arrival of global peak oil extraction, and China’s surging oil demand (as the country’s economy continued to grow at near double-digit rates) led to a new round of rising oil prices. Their nominal peak in July 2008 was followed by a precipitous fall that was reversed again by new nominal highs in 2012 and 2013. They were nothing but a brief prelude to yet another swift retreat in 2014 and 2015 with low levels prevailing through 2016 and 2017. A somewhat different perspective arises when oil prices are expressed in constant monies (adjusted for inflation). This adjustment shows a century-long decline prior to 1970, and another period of general decline or stagnation between 1981 and 2003. After two spikes, in 2007–2008 and 2012–2013, the price in constant monies was no higher in 2015 than it was in 1985 (see figure 4). Historically speaking, the world price of crude oil continues to be a great bargain.
The impossibility of predicting sudden shifts in oil demand, the risk of violent conflicts and political upheavals, and a distorted understanding of oil resources combine to produce a market ruled by perception, fear, herd behavior and temporary panic – and hence commonly by overreaction. One year the headlines have the world drowning in oil, a few years later they have it facing the end of the oil era. All long-range forecasts of oil prices are thus irrelevant. OPEC’s Oil Outlook to 2025, published in 2004, anticipated that oil prices would settle at between $20–25/b. But just a decade later OPEC’s outlook changed, anticipating constant prices of $110/b until 2020 and then a slight decline to $100/b (in 2013 prices) by 2025. While OPEC was predicting the price to remain steady at $20/b it actually rose to $100/b, and when it thought it would stabilize at $110/b it actually fell to as low as $30/b, contrasts proving yet again the limits of OPEC’s influence and the utter futility of even short-term forecasts, a fact that, alas, leaves no impression on small armies of economists engaged in constant price forecasting!
Figure 4 Crude oil prices, 1861–2016
Basic facts about the global oil business involve some very large aggregates. In 2016 (when the average oil price was $43/b) global sales of crude oil were worth just over $1.5 trillion. This was equal to 2% of the world’s economic product of about $75 trillion, a bit less than the GDP of Canada and almost equal to Russia’s GDP. These comparisons confirm that crude oil is not an overpriced energy source. Matters change when we move (using oil industry parlance) downstream as oil companies add a great deal of value (profit) by transporting and refining crude oil and by marketing the final products, and governments also step in to collect taxes. Even then refined products are still quite affordable in all high-income countries, but in the Netherlands in 2017 a barrel of gasoline was five times more expensive than a barrel of crude oil, with multiples ranging from less than 4.5 in the UK to about 3.5 in Japan, and to less than 2 in the US.
Despite world oil prices remaining relatively low, in 2016 five of the world’s ten largest publicly listed companies (by annual revenue) were in the oil business: China National Petroleum Corporation (number 3, $299 billion), Sinopec (number 4, $294 billion), Royal Dutch Shell (number 5, $272 billion), Exxon (number 6, $231 billion) and BP (number 10, $226 billion). Combined revenues of these five companies reached about $1.3 trillion in 2016, surpassing the nominal annual GDP of Russia in that year. But in 2014, when the average world oil price was close to $100/barrel, the combined revenue of these five companies was nearly $2.1 trillion. By this point, oil had earned a reputation for such volatility. In 1998 The Economist headlined the oil industry as ‘The decade’s worst stocks.’ This was followed by record profits at the turn of the twenty-first century that ended abruptly in 2008 with the greatest economic crisis since World War II. But price fluctuations aside, it must be remembered that, given the high taxes imposed on refined products by Western governments, oil producers have actually made substantially less money than state treasuries.
The US has been an exception: with federal and state taxes on gasoline amounting to 21% in 2016, the unit price of that fuel is mostly the cost of crude oil (about 43% in 2015) and the industry margin (about 36%). But in 2016, Japan’s taxes amounted to 40% of the price of gasoline, while in Germany it was 55% and in the UK, 67%. As a result, the taxes collected on liquid fuels by the world’s seven largest economies (G7) have surpassed the annual oil revenue of the 13 OPEC nations combined. In addition, since the 1960s, the global oil business has been dominated by state-owned companies whose role and revenue will only increase, as they control most liquid oil reserves and a large share of non-traditional reserves in oil (tar) sands.
NATIONAL OIL COMPANIES
These companies now control most of the world’s oil reserves, and hence most of today’s, and future, production. In 2015 the four largest ones – Saudi Aramco, National Iranian Oil Company (NIOC), Iraq National Oil Company (INOC) and Kuwait Petroleum Company (KPC) – held almost 40% of the world’s total conventional oil reserves, virtually all of them in conventional (liquid oil) deposits. The next four – Petróleos de Venezuela, Abu Dhabi National Oil Company (ADNOC), Libyan National Oil Company and Nigerian National Petroleum Company (NNPC) – controlled an additional 28%, mainly thanks to Venezuela’s huge deposits of Orinoco tar sands that make the country the world’s first in total (conventional and non conventional) crude oil reserves, ahead of Saudi Arabia. Canada, thanks to Alberta’s oil sands, now ranks third. When including publicly traded companies in the list, Russia’s Rosneft, the country’s largest firm, would come twelfth with about 1.8% of global oil reserves, followed by Exxon with nearly 1.5% of the total.
National oil companies have differed greatly in terms of their competence, performance and foresight. Norway’s Statoil may be, in many ways, a model state oil company with transparent operations and extensive investment in oil exploration and production, but most of the state-run oil companies in modernizing countries have been poorly managed and perform well below their potential. The largest one, Saudi Aramco, headquartered in Dhahrān on the Gulf, has been the world’s largest oil producer since 1978 when it completed its compensated nationalization of Aramco’s assets. The company has been run fairly smoothly but in a secretive manner. That will certainly change in the future: in 2016 the company decided to proceed with the initial public offering of up to 5% of its assets (at a predicted price of about $100 billion) but by mid-2017 its actual timing and success remained uncertain. Saudi Aramco’s 2015 Facts and Figures and Annual Review publications contain data on reserves, production and refining capacity, but only one table on sales (of refined products for the domestic market) and not a single figure regarding the company’s revenues (in 2014, before average world oil prices fell by more than half, those revenues were slightly more than a billion dollars a day) or its operating costs or profits. The company has also released very little information about the recent status of al-Ghawār, the world’s largest oilfield. This led to some speculation about the field’s long-term prospects but the continued high Saudi output clearly indicates that the field is not nearing its exhaustion. In 1973, the year of the first round of large crude oil price increases, the company produced 384Mt of crude oil and by 1980 the output had risen to 509.8Mt; the subsequent collapse of oil demand reduced extraction to as little as 172Mt in 1985 but a new record was set only twenty years later with 521.3Mt in 2005, and in 2016 Saudi Arabia produced about 586Mt, just 1.3% more than the US.
The National Iranian Oil Corporation (NIOC) controls about 9% of global oil reserves but for decades it was managing a modern industry in a country that did not allow foreign companies to own equity in Iranian companies or to operate production concessions. The NIOC could thus only award contracts that guaranteed a share of eventual production from a field developed with foreign investment. Companies from Malaysia, France, Italy, Spain and China have participated in these arrangements. This has changed with the lifting of economic sanctions in 2016, after which the NIOC invited Western companies to bid on oil and gas projects. Output still has far to go before reaching the old record levels: under the Shah during the mid-1970s Iran’s oil flow peaked at 303Mt in 1974, but in 2016, at 216Mt, it was still nearly 30% lower and barely higher than a decade ago.
A free market has not been one of the hallmarks of the 150 years of oil’s commercial history. The oil business has seen repeated efforts to fix product prices by controlling either the level of crude oil extraction or by dominating its transportation and processing, or by monopolizing all of these aspects. The first infamous, and successful, attempt to do so was the establishment of Standard Oil in Cleveland in 1870. The Rockefeller brothers (John D. and William) and their partners used secretive acquisitions and deals with railroad companies to gain the control of oil markets first in Cleveland, then in the Northeast, and eventually throughout the US. By 1904 what was now known as the Standard Oil Trust controlled just over 90% of the country’s crude oil production and 85% of all sales.
The trust was sued by the US government pursuant to the Sherman Antitrust Act of 1890 but it wasn’t until 1911 that the order to dissolve it was upheld by the Supreme Court. The dissolution produced more than thirty separate companies that continued to use the Standard name, and the names of the largest of these are still prominent – after repeated mergers, reorganizations, acquisitions and name changes – among the world’s largest publicly traded oil companies.
Standard of New Jersey became Esso. Standard of New York (Socony) merged with Vacuum Oil Company and in 1966 it was renamed Mobil. Esso was renamed Exxon in 1972 and in 1999 it combined with Mobil to form one of several double-name oil companies, ExxonMobil. Standard Oil of California (Socal) became Chevron in 1984 and in 2001 it merged with Texaco to form ChevronTexaco (with the Texaco brand remaining only outside North America). Standard of Ohio (Sohio) was bought by BP (between 1984 and 1987) and Standard of Indiana Amoco (rebranded as Amoco in 1973) merged with BP in 1998, but the double name BPAmoco lasted only until 2000 when BP also bought Atlantic Richfield (ARCO).
This longevity of major oil companies extends beyond the Standard pedigree and beyond the US business. In the US, Gulf Oil was established in 1890, Texaco was set up in 1901, Royal Dutch Shell was chartered in 1907, and the Anglo-Persian Oil Company (using the name British Petroleum since 1917) was set up in 1909. In 1928 the chairmen of Standard Oil’s three largest successors, Esso, Socony and Socal, and their counterparts from Royal Dutch Shell and Anglo-Persian met in Scotland’s Achnacarry Castle, essentially to divide the global oil market and to stabilize the price of crude oil. After this informal oligopoly was joined by Gulf and Texaco it became widely known as the Seven Sisters (le sette sorelle, the name used first by an Italian oilman, Enrico Mattei). Their domination of the entire chain of the global oil business, from exploration to gasoline marketing, made it possible to set prices for the newly discovered oil that they began to produce after World War II in the hydrocarbon-rich countries of Asia, Africa and Latin America.
The dominance of major multinational oil companies began to weaken during the 1960s with the rise of OPEC, and their global importance was rapidly reduced to a small fraction of their former strength by a wave of nationalizations during the 1970s. In 1960 the Seven Sisters produced more than 60% of the world’s oil, but by 1980 that share had fallen to about 28%, and in 2016 it had declined further to only about 13%. OPEC was not the first organization set up explicitly to manage oil prices: it was modelled on the Texas Railroad Commission, a state agency that began to regulate railroads in 1891 and added responsibilities for the regulation of the oil and gas industry in 1919. After the discovery of the East Texas field brought a precipitous fall in oil prices, the commission was given the right, in 1931, to control the state’s oil production through prorated quotas in the form of a monthly production allowance that set the permissible percentage of maximum output. With Texas being the country’s largest oil producer and the US dominating global oil output (with Texas producing more than half of the world’s crude) this right amounted to a very effective cartel of worldwide importance run by an obscure state agency. In 1950 the US still produced about 53% of the world’s crude oil, a higher share than OPEC had at any time after 1973 (in 2015 its share was about 42%), but matters began to change radically during the 1950s.
Between 1950 and 1970 oil from new Middle Eastern discoveries began to reach the global market and helped to drive a worldwide economic expansion that proceeded at an unprecedented annual rate of nearly 5%. During that period US oil demand, relatively high to begin with, nearly tripled, and as post-WWII Western Europe and Japan began to convert from coal to oil-based economies their oil demand rose even faster so that by 1970 the affluent countries were consuming four times as much oil as they did in 1950. The beginnings of industrialization in many low-income Asian and Latin American countries further added to the rise in global oil demand. But new discoveries easily supported this and in 1960 major oil producing companies (led by the Seven Sisters) reduced their posted crude oil prices, the fictitious valuations that were used for calculating the taxes and royalties owed to the oil-rich nations whose resource these companies were selling worldwide. In response to this move five oil-producing states set up the Organization of Petroleum Exporting Countries (OPEC) in Baghdad in 1960.
As of 2017 OPEC had 14 members. Saudi Arabia, Iraq, Kuwait, Iran and Venezuela were the founding nations. Qatar joined in 1961, Libya and Indonesia in 1962, Abu Dhabi in 1967, Algeria in 1969, Nigeria in 1971, Ecuador in 1973 and Gabon in 1975 (the last two countries left the group in, respectively, 1993 and 1996). Angola came on board on January 1, 2007, the same year Ecuador rejoined and Indonesia left after its oil output declined. Seven years later, in December 2015, Indonesia returned only to be suspended a year later because of disagreements about production quota, Gabon rejoined, and Equatorial Guinea joined in 2017. The first step for the new organization was to protect its revenues: all the early OPEC members agreed not to tolerate any further reductions of posted prices, and income tax became an excise tax. By the late 1960s continuing high demand for oil had begun to create a seller’s market. In response to this, in September 1971, Libya increased both its posted oil price as well as the tax rate paid by foreign oil companies. In February 1971, twenty-two leading oil companies accepted OPEC’s demand (justified by a weaker dollar) for a new 55% tax rate, an immediate increase in posted price and future price increases.
Even before this took place rising oil demand led the Texas Railroad Commission to lift its limits on production in March 1971, ending an era of price-controlling power thanks to the newly assertive OPEC. Concurrently, the prospect of higher oil prices began a wave of nationalizations that continued for most of the 1970s: Algeria nationalized 51% of French oil concessions in February 1971; Libya began its nationalizing with BP holdings in December 1971; Iraq took over all foreign concessions in June 1972; OPEC approved a plan for 25% government ownership of all foreign oil assets in Kuwait, Qatar, Abu Dhabi and Saudi Arabia in October 1972; and in January 1973 Iran announced that it would not renew its agreements with foreign companies when they expired in 1979. Another important change that opened the way to a new regime of global oil pricing took place in April 1973 when the US government ended the limits on the import of crude oil east of the Rocky Mountains set by President Eisenhower in 1959. This decision saw a rapid rise in US oil imports.
On October 1, 1973, OPEC, looking for higher profits, raised its posted price of $2.59/b by 16% to $3.01. On October 16, 1973, following the Israeli victory over Egypt in Sinai, the six Arab Gulf states raised posted prices by an additional 17% to $3.65/b, and three days later OPEC’s Arab members embargoed all oil exports to the US until Israel pulled out of occupied Arab territories (the embargo was soon extended to the Netherlands because Rotterdam had Europe’s largest oil terminal and refineries). On January 1, 1974, the six Gulf states raised their posted price to $11.65/b, a 4.5-fold rise in one year. The embargo on imports to the US was abandoned in March 1974 (it could not succeed as multinational oil companies simply rerouted their tankers). OPEC’s first round of steep price increases was followed by a few years of minor changes. In 1978 the price reached $12.93/b, and the Saudi government acquired complete control of Aramco, creating the world’s largest national oil company (in 2015 it produced more than four times as much crude oil as Exxon, the world’s largest private operator). The effects of more than quadrupling the world oil price between 1973 and 1974 (and quintupling it, in nominal terms, between 1973 and 1978) were rapid and far-reaching. In North America and Europe the sudden price rise and the embargo resulted initially in a (false) perception of a physical shortage of oil and led to long car queues at filling stations, fuel rationing schemes and widespread fears of being at the mercy of greedy OPEC countries in general and unpredictable oil-rich Arab regimes in particular.
These fears soon subsided (there were no fuel shortages) but the serious economic consequences of the large price hike became clear as consumers and national economies, habituated to decades of low (and in real terms falling) oil prices had no choice but to pay five times as much for fuel. The full impact on the US economy (in 1974 the US imported about 22% of its crude oil demand) was delayed because of the crude oil price controls that were imposed in August 1973 during President Nixon’s second term. Consequently, the average inflation-adjusted price of US gasoline in 1978 was still no higher than it was a decade earlier, and the price of refined products rose to levels unseen since World War II only after the controls were abolished on January 28, 1981, when President Reagan came into office.
Japan (with all but 0.1% of its oil imported) and most European countries (importing in excess of 90% of their oil needs) were much more vulnerable than the US but they had one important advantage: their overall energy use was already much more efficient than in North America and the price shock only intensified these efficiency efforts and led to a higher reliance on other fuels and on nuclear electricity. Most remarkably, Japan’s GDP, after falling by 0.5% in 1974, was up by 4% in 1975 even as the country’s overall energy use fell by nearly 5%. OPEC’s windfall was large: the total revenues of its member states tripled between 1973 and 1978, but high inflation generated by quintupled oil prices meant that between 1974 (after the initial hike) and 1978 world oil prices actually fell in real terms.
But a second round of oil price rises was about to begin. Demonstrations against Shah Mohammad Reza Pahlavi began in Tehran in January 1978. By the end of the summer Iran was under military rule and by December its oil production had fallen sharply. On January 16, 1979, when the Shah fled into exile, OPEC’s oil price averaged $13.62/b; twelve months later, with Ayatollah Khomeini back in Iran, and with the US embassy occupied by student radicals, the price nearly doubled to $25.56/b. A year later (after Iraq invaded Iran in September) it was $32.95/b. The peak was reached in March 1981 with the average at $34.89/b, the best-quality crude oils selling on the spot market for around $50/b, and experts widely predicting prices of $100/b in just a few years.
Economies that had begun to recover from the first price hike were hit again, and more seriously. In 1982 the US GDP fell by 2%, but the record high oil prices caused the greatest setbacks in Asia, Africa and Latin America: their industries, transportation and also urban cooking (using kerosene stoves) depended on oil imports and the high (dollar denominated) prices were reducing their future export earnings. But with the second round of price rises OPEC clearly overplayed its hand. This time oil prices rose high enough to do three things that greatly weakened OPEC’s dominance of the market. The resulting economic slowdown depressed the global fuel demand: by 1983 it was 10% below the 1978 peak (and in the US the cut was 21%); it reinforced the drive for higher energy efficiency; and it led to vigorous oil and gas exploration and development in non-OPEC countries. The results of this combination were impressive. In 1978 non-OPEC oil producers (excluding the USSR) extracted 35% of the world’s oil but in 1983 their share rose to 45% while OPEC’s share fell to just 31%.
At first OPEC tried to keep the prices high, lowering the market rate to only $33.63 per barrel during 1982, but the oil glut persisted and by early 1983 it had to cut it to $28.74/b. The end came in August 1985 when the Saudis decided to stop acting as the swing producer (repeatedly cutting their oil output to prop up the falling prices) and linked their oil price to the spot market values, and at the beginning of 1986 doubling their extraction in order to regain their lost market share. Oil prices fell to $20/b by January 1986, and in early April they dipped below $10/b before they temporarily stabilized at around $15/b. They remained low for the remainder of the 1980s and even the Iraqi invasion of Kuwait (on August 2, 1990) and the First Gulf War (January 16 – February 28, 1991) produced only short-lived spikes followed by a decade of prices that stayed mostly between $15–20/b.
The average export price reached $23/b in January 1997 but the drop in demand caused by a short but severe Asian financial crisis depressed the price to just $9.41/b by December 1998. Once again, low oil prices were being taken for granted and, once again, energy demand began rising even in those rich nations that were already by far the largest users, and importers, of oil. During the 1990s, energy consumption rose by almost 15% in the USA, 17% in France, 19% in Australia and, despite a stagnating economy, by 24% in Japan. OPEC’s share of global oil output rose again to above 40% and oil prices rose to more than $25/b by the end of 1999 and briefly surpassed $30/b in September 2000. Prices fell again with the onset of the worldwide economic recession in the wake of the terrorist attack on the USA on 11 September, 2001, but they went on to double to more than $50/b by the end of 2005 and remained at that level in 2006. What followed has no precedent in the history of oil prices. Twice during the next ten years, a rapid ascent was followed by an equally rapid price drop.
THE DECADE OF UPS AND DOWNS
Crude oil prices (the following values refer to the US benchmark, West Texas Intermediate crude, FOB at the main trading hub, Cushing in Oklahoma) continued their steady rise and ended 2007 at $95/b, and then their growth accelerated to reach, during the first week of July 2008, a new all-time high of $145.31/b. On September 15, 2008, Lehman Brothers filed for bankruptcy and the worst economic crisis of the post-WWII era began to unfold at a shocking speed. By the end of 2008 crude oil was trading at just $33/b, a 79% slump in six months. As the US government began the economic rescue (by printing unprecedented quantities of dollars) prices began to recover: they more than doubled during 2009 and ended 2011 at $100/b. They went temporarily even slightly higher in 2012 and 2013 when they ended at $99/b. Then, in 2014, there was a close replica of 2008: the late June peak of $107/b was followed by a retreat to $53/b at the year’s end. A year later the price drifted down to $37/b and in the second week of February 2016 it went as low as $26.19/b. By the end of the year it had doubled to $54/b but by mid-2017 it was once again below $50/b.
Several developments combined to produce this decade-long roller coaster. The most important factor behind the first rise was the increase in demand, both by traditionally large Western oil importers and by the rapidly expanding Chinese and Indian economies. But the price rise was also driven by the unsettled situation in occupied Iraq and by concerns about terrorist attacks in general and strikes on Saudi oilfields or oil terminals in particular. Moreover, low stock market returns attracted speculative investments in oil futures, and all of this while the media were disseminating misleading stories about an imminent peak of global oil production that was to be followed by a scramble for diminishing resources heralding the painful end of modern civilization (see chapter 5). In July 2008, as the price passed $140/b, there was no shortage of energy experts forecasting an imminent rise to $250/b – but they would have been wrong even without any economic downturn because such a high price would have done what a similarly high price (when adjusted for inflation and oil intensity of the economy) began to do in 1981: destroy the demand.
At the same time, it must be realized that not only small changes in the global supply or demand, but their mere anticipation, can bring disproportionately large price moves and that there is no simple correlation between the two trends. In 1980 crude oil prices rose by 51% (driven by the takeover of Iran by fundamentalist mullahs) even though consumption fell by 4%. In 1986 consumption rose by 3% as prices fell by 46%; similarly, in 2009, consumption fell by nearly 2% but prices declined by 38%; and in 2015, consumption rose by nearly 2% but the price declined by 30%, with the rising US output, propelled by shale oil, creating fears of enormous supply gluts.
Nobody is in control of oil prices – or else that entity would have a peculiar taste for wild swings and a near-permanent lack of stability and predictability (see figure 5). The key lessons from this high price volatility and the global economic consequences of these unpredictable, excessive fluctuations have been widely ignored or misinterpreted. In the first place, the price gyrations in general, and the recurrent periods of high post-1973 prices in particular, have never reflected any imminent or rapidly approaching physical shortage of oil, as the resource remains abundant. For more than three decades a key reason for price over-reaction to small supply or demand moves was the minimal safety cushion created by OPEC: its production in 2003 was just 1% higher than in 1973, the year of the first round of oil price increases. By 2015 OPEC, in an attempt to break the rising power of US shale oil producers, by forcing prices lower and hoping that many of them would go bankrupt, was producing 20% more than the 2003 level, but this new strategy of flooding the market did not bring the desired effect and by November 2016 OPEC was, once again, cutting its crude oil production.
Figure 5 Year-to-year changes of oil prices, shown here for thirty-four years between 1981 and 2015, reveal virtually random shifts that are impossible to forecast.
The greatest challenge for OPEC has been always to keep the price below the level that would lead to a substantial drop in demand for oil, to increased hydrocarbon exploration in non-OPEC countries and to government-subsidized investment toward alternative energy sources. In its public pronouncements OPEC has repeatedly professed its aversion to such demand-destroying prices and its commitment to a stable oil market and security of supply, but its actions have often had the very opposite effect.
But OPEC has never been a sole price setter: Western demand has been always a key factor and affluent economies could have been much more aggressive in reducing their dependence on oil, while speculation on the three major international petroleum exchanges (in New York, London and Singapore) can amplify what would otherwise be small price shifts, particularly during exaggerated reactions to sudden shifts (recessions, suddenly booming demand), catastrophic events (such as Hurricane Katrina that cut the Gulf of Mexico production) or to the mere fear of them. The rise of US shale oil extraction and the re-emergence of the US as the world’s leading oil producer has led many commentators to argue that OPEC has lost any influence, but such a conclusion is as wrong as their previous claims that OPEC was in total control. No doubt OPEC’s price-setting capability has been greatly weakened by the rise of US shale oil production, but no matter how successful that endeavor will be in coming decades, nothing can change the fact that most of the conventional resources of crude oil are controlled by OPEC countries, and particularly by the Middle Eastern members, and that alone guarantees their continuing influence.
Oil links and the real cost of oil
The world’s single most important source of fossil energy and its truly worldwide extraction, transportation, processing and combustion affect every realm of modern life. The performance of all but the poorest economies, matters of both domestic and international politics in both oil exporting and oil importing countries, quality of life, a great deal of strategic thinking on the part of major powers, particular military actions during times of war and the state of the Earth’s environment – all of these are demonstrably linked to oil, but virtually all of these linkages are complex and their consequences are often counterintuitive. Primary energies of fossil fuels have been the necessary engines of modern economies but their abundance alone is not enough to bring admirable economic achievements and to guarantee an improving standard of living.
Just before its demise the USSR was the world’s largest producer of both crude oil and natural gas but the country’s economy was a dismal underperformer and the average income of Soviet citizens was a fraction of the French or German mean, although those two countries had to import virtually all of their oil. Modernizing (an adjective I prefer to developing) oil-rich nations in general, and OPEC nations in particular, provide even better examples of this reality. Except for Nigeria (190 million people in 2017) and Iran (80 million), OPEC nations have very small or relatively small populations, and since the early 1970s they have benefited (albeit, as just explained in the previous section, in a highly fluctuating manner) from enormous transfers of wealth from oil-importing countries. In 2012, the year of record profits, the current account balance of OPEC countries was nearly half a trillion dollars in the black – but in 2015 it was $100 billion in the red, as Saudi Arabia went from +$165 billion ($5,650/capita) to -$41 billion. The past periods of fabulous earnings have visibly transformed all Middle Eastern oil producers: but judging the progress by the number of new skyscrapers, giant airports and shopping centers would be misleading as economic and social advances have not been commensurate with the new riches.
OIL, HUMAN DEVELOPMENT, FREEDOM AND CORRUPTION
One of the most revealing international comparisons is the Human Development Index (HDI) that is made up of three major components: life expectancy at birth; adult literacy rate and combined gross enrolment ratio in primary to tertiary education; and GDP per capita expressed in terms of purchasing power parity. This simple shortcut serves well as an indicator of a nation’s relative achievements and it reveals that none of the oil-rich Middle Eastern nations is performing well. There are 188 nations listed in the 2015 edition of the Human Development Report, with ten countries at the top (including Norway, Australia, the US, Canada and New Zealand). But Saudi Arabia is ranked 38th, United Arab Emirates 41st, tiny, super-rich Kuwait 48th and Iran 69th (and Nigeria occupies 152nd place, even behind 149th Angola).
Figure 6 Oil-rich Middle Eastern underperformers
Even more telling is the difference between the rank of the average per capita gross national income (GNI) of a country and its HDI rank: positive numbers identify the nations whose state of development is higher than expected when judged solely by their GDP; negative numbers apply when a nation’s HDI lags behind its GNI. In this respect, all oil-rich Persian Gulf nations have been dismal underperformers: not only do they have negative scores, but these scores are among the highest worldwide, indicating that no other group of countries has used its riches so unwisely (see figure 6). Rankings by the political freedom index put five Persian Gulf oil producers (Saudi Arabia, Iran, Iraq, UAE, Qatar, Oman) as well as Libya, Algeria and Venezuela into the bottom, not free, category and Kuwait and Nigeria into the lower ranks of the partly free group. Another revealing set of comparisons concerns corruption. Long ago, Pablo Pérez Alfonso, a founder of OPEC, spoke of oil as a curse, bringing waste, corruption and excessive consumption, and his conclusion (oil-rich Norway aside) has been amply confirmed with every new entrant, most recently Angola (joined OPEC in 2007) and Equatorial Guinea (oil discovered in 1995, allowed to join OPEC in 2017). Transparency International’s Corruption Perception Index for the year 2016 ranges from the cleanest, Denmark (90), to hopeless Somalia (10). Libya and Iraq were at near-Somalia levels, Angola got a dismal 18, Nigeria got 28 and Russia joins this unenviable oil-rich group with a corruption index of 29, the same as Iran, while Saudi Arabia got 36 (see figure 6).
The evidence is clear: oil-rich countries in general, and the Middle Eastern ones in particular, have not used their considerable wealth to build more equitable and less corrupt societies with a higher quality of life. In fact, the opposite is true as they have too often embodied (and to an exceptionally high degree) many negatives that prevent real modernization of their societies: record-breaking skyscrapers and gargantuan airports do not make up for such fundamental deficits.
And it does not get any better once we turn to the stability of governments and civil institutions and long-term prospects for security. There are only two non-Western oil-rich countries (Qatar and United Arab Emirates) whose politics and stability are not matters of chronic concern and anxious speculation. Worries about long-term stability in most OPEC countries, and particularly in Saudi Arabia, Iran and Nigeria, have, for decades, generated vast speculative literature and more warnings and catastrophic scenarios are sure to come. Perhaps the most useful fact to keep in mind is that most of these writings are produced by people who understand neither Arabic nor Farsi and whose knowledge of the culture steeped in Islam is limited to repeating such often misunderstood terms as jihād or fatwa.
Any assessment of the Middle East’s largest oil producer must take into account the secretive nature of decision making within Saudi Arabia’s extensive ruling family and the complexity of the country’s traditions and its slowly unfolding reforms. Unfortunately, we are often offered caricatures rather than revealing portraits of the country. Most notably, the Saudi royal family has been portrayed for decades as unstable, insecure and out of touch, and many commentators have explicitly predicted its imminent (and violent) demise when the corrupt and incompetent princes will be swept away by religious zealots or by impatient reformers. Yet, somehow – and with only relatively small incremental concessions toward broader democratic rights (such as finally allowing women to vote in municipal elections in 2015) – the family has remained in control. Of course, this simple observation is not proof of the family’s real and lasting stability, merely a reminder that prevailing Western analyses have been repeatedly wrong.
The analytical and interpretive task is no easier as far as Iranian affairs are concerned. Outsiders have to reckon with the complex dynamics of the now decades-long struggle for influence and power among the ruling fundamentalists. Nationalist zealots have been conveniently strengthened not only by periodically high oil earnings but also by the US invasion of Iraq that opened the way for now pervasive Iranian support of the shī’ī leadership in Baghdad. As a result, some Western commentators have been portraying Iran as an almost superpower-like actor whose expansive designs for a new shī’ī dominated Middle East (ominously reinforced by the country’s quest for nuclear weapons) will, at a minimum, destabilize the entire region and may even lead to a global conflict. But the country has also had some more pragmatic leaders who may be supported (on a few occasions openly by street demonstrations) by a large proportion of the country’s young (but tightly controlled) population but who are unlikely to gain control of the fundamentalist state.
Matters do not get any better when attention is turned to the violence and extraordinary level of corruption and political tension in Africa’s most populous state, Nigeria. Oil production in the Niger Delta has been repeatedly disrupted by rebels who blow up pipelines and oil terminals, and kidnap oil workers and executives, even as chronic discord between the federal and state governments is being exacerbated by rising income inequalities, persistence of extraordinary levels of corruption, radicalization of the Muslim North and, since 2010, violent clashes with Boko Haram, a terrorist outfit operating mostly in the state of Borno. Contrary to the direst predictions, Nigeria may not dissolve anytime soon in a new civil war, but its seemingly intractable problems guarantee the continuation of protracted abysmal economic underperformance and endless political, social and security crises.
And the litany of concerns does not end with these great oil players. Algeria has been through a long and brutal civil war as the secular government fought the fundamentalists, and the stability of its regime remains uncertain. For a short time the prospect was more promising in Libya after its leader had publicly forsaken decades of erratic and violent ways (bombing a Pan Am flight in 1988, supporting terrorist movements abroad, developing nuclear weapons) but this new-found moderation was short-lived: by 2011 Gaddāfī was dead and Libya split into warring factions that were unable to agree on reconstituting an effective and truly national government (although this has not prevented considerable recovery of oil output in 2016 and 2017).
Oil’s impact on politics and policies is also ever-present in affluent countries whose prosperity is underpinned by large-scale oil imports, and its expressions range from questionable attitudes toward oil-exporting nations to the use of oil imports as a reason for not just advocating but heavily subsidizing alternative energy sources. Attitudes toward oil-producing nations find their most extreme expression with respect to Middle Eastern countries. Among the Western political elites these feelings have ranged from kowtowing to unsavory rulers and eagerly selling them arms all the way to calls for the US to rethink (at a minimum) its ties with what many commentators see as terrorism-breeding, fundamentalist, treacherous and family-ruled Saudi Arabia. Many Western politicians and activists argue the best long-term solution to cutting the addiction to oil imports from the chronically unstable Middle East is to achieve energy independence.
During the late 1970s this led to a very expensive commitment to a massive development of oil from the Rocky Mountains oil shales (promptly aborted), and subsequently this quest led to an uncritical embrace of heavily subsidized, environmentally unfriendly and barely net energy-positive corn-derived ethanol. From a purely economic standpoint it is counterproductive to divert limited resources to endeavors that would supply a more expensive substitute and in ethanol’s case also one whose production would yield only a small net energy return. Although the chances of any lasting embargo on oil exports from countries whose very survival depends on them are highly unlikely (Gaddāfī’s Libya or Khomeini’s Iran were equally faithful suppliers of oil to the West as its supposedly great ally, Saudi Arabia), a move toward reduced dependence on imports makes economic and strategic sense. A greater level of domestic energy self-sufficiency would improve the trade balance and, although oil-producing countries might always be willing to supply the fuel, the certainty of shipments could be interrupted by a hostile power. Such a scenario has become more likely following Iranian boasts about having the ability to close the Strait of Hormuz to tanker traffic and Chinese claims to sovereignty over nearly all of the South China Sea.
For decades, American dreams of energy independence remained just that, but that elusive goal has been, rather suddenly and unexpectedly, brought much closer to reality by rapid adoption of horizontal drilling and hydraulic fracturing of shales, an innovative extraction method whose details will be explained in the fourth chapter. Fracking, as the practice is commonly called, has had a stunning impact as it has made the US, once again, the world’s leading producer of hydrocarbons.
OIL AS CASUS BELLI
Oil’s strategic role has been consistently overplayed by some careless historians. The most notorious example of these exaggerated claims is that Japan attacked Pearl Harbor in 1941 because in January 1940 the Roosevelt administration abrogated the 1911 Treaty of Commerce and Navigation, in July 1940 stopped licensing for exports of aviation gasoline and in September 1940 added a ban on exporting scrap iron and steel. Apologists for Japan thus argue that this forced Japan to attack the US in order to secure its access to Indonesian and Burmese oilfields. But claiming that is to ignore the fact that Japan began its conquest of Manchuria in 1933, culminating in an attack on China proper in 1937, and that if this aggression against China had been abandoned the country could have maintained free access to all imports: clearly, attacking Pearl Harbor was a self-inflicted blunder. And while it is true that Hitler tried to capture the rich Baku oilfields after the invasion of the USSR, it is obvious that Germany’s serial aggression against countries such as Czechoslovakia, Poland, France, the UK, Yugoslavia, Greece and the USSR was not motivated by controlling foreign oil production.
In contrast, indirect foreign interventions in Middle Eastern countries (arms sales, military training, generous economic aid) have aimed either at stabilizing or subverting governments in the oil-rich region. Their most obvious manifestation during the Cold War was the toppling of Mossadegh’s government in Iran in 1953; the sales (or simply transfers) of Soviet arms to Egypt, Syria, Libya and Iraq; the concurrent American arms shipments to Iran (before 1979), Saudi Arabia and the Gulf states; and the Western support of Iraq during its long war with Iran (1980–1988). And, of course, the Gulf War (1991) and the US invasion of Iraq in 2003 have often been portrayed as purely oil wars.
Saddām Hussein’s occupation of Kuwait in August 1990 doubled Iraq’s crude oil reserves (to about 20% of the world total) and it also directly threatened the nearby supergiant Saudi oilfields and hence the survival of the monarchy that controls a quarter of the world’s oil reserves. The massive anti-Saddām coalition and half a million troops engaged in Operation Desert Storm in 1991 could thus be seen as a perfect example of an oil-driven war. But other concerns were also at play: Hussein’s quest for nuclear weapons with which the country could dominate and destabilize the entire region, and the risk of another Iraqi–Iranian or Arab–Israeli war. And if the control of oil was the primary objective of the 1991 Gulf War, why then were the victorious armies not ordered to occupy at least Iraq’s southern oilfields?
Similarly, more complex considerations were behind the conquest of Iraq in March 2003. The two most important factors were a decade-long refusal of the Iraqi regime to comply with numerous UN resolutions, and the traumatic impact of 9/11 attacks on US foreign policy. Both of these factors led to a shift among the international community from trying to isolate a hostile regime in Baghdad to the pre-emption of a possible new attack, a fear based, as became clear later, on mistaken assumption about Iraq’s advances in producing weapons of mass destruction. At the same time, there was an implied grand strategic objective of eventually having an elected government in a pivotal state in the Middle East that might serve as a powerful and stabilizing political example in a very unsettled region and be a mighty counterweight to any radicalizing tendencies: that this has not worked out does not invalidate the original intent.
In any case, what many commentators saw simplistically as a clear-cut case of oil-driven war has been anything but. The invasion (2003) and occupation of Iraq (the last regular US forces were withdrawn in 2011) exacted high human and economic tolls (conservatively put at hundreds of millions of dollars) and once the country’s oil production began to recover the US was not its primary beneficiary. In 2012, a year after American withdrawal, 72% of Iraqi crude oil exports went to East Asia (mostly China) and the EU, and by 2015 that share was up to 90%. Obviously, the US has never had any existential need for Iraqi oil (and does so even less now as it has regained the status of the world’s largest oil producer), but judging by the destination of Iraqi oil exports should we then conclude that the US fought in Iraq to benefit China and the EU?
But there is no doubt about the importance of oil for modern armies. World War I was dominated by railways, cavalry, horse-drawn wagons and guns and forced marches. During World War II German and Soviet armies still deployed large numbers of horses, but it was the first largely mechanized conflict relying on trucks, tanks and planes. Fuel demands rose afterwards with the development of better armed and more powerful tanks and with the introduction of jet aircraft. America’s 60t M1A1 Abrams battle tank consumes kerosene at no less than 400 l/100km (for comparison, the 2017 Mercedes model S600 needs 21 l/100km in city driving, and the 2017 Honda Civic needs 10 l/100km). Kerosene requirements of supersonic combat aircraft are so high that no extended mission can be flown without in-flight refueling from tanker planes. Not surprisingly, the US Department of Defense has by far the highest oil consumption of all government agencies: in 2015 its demand accounted for about roughly 90% of all refined fuels bought by the government. But, again, a caveat is in order: oil supremacy is not a decisive factor in asymmetrical conflicts, a reality amply demonstrated in Vietnam, by the plane-borne attacks of September 11, 2001 and by numerous suicide bombings (above all in Iraq and Pakistan) during the subsequent years.
Oil and the environment
Perhaps the most newsworthy environmental impacts of the oil industry are the periodic accidents in which giant tankers spill large volumes of oil into the sea and onto beaches, resulting in the long-lasting pollution of beaches or rocky shores and in the highly publicized mass mortalities of sea birds. Less noticeable is the contamination of zooplankton and the persistent presence of oil in anoxic sediments that has a long-term influence on benthic invertebrates. The worst tanker accidents have been those of the Atlantic Empress that spilled 287,000t off Tobago in 1979 and the ABT Summer that released 260,000t off Angola in 1991. Both of these mishaps took place far offshore and hence they received much less attention than the world’s third and fourth largest record spills, the Castillo de Bellver that released 253,000t of crude off South Africa’s Saldanha Bay in 1983, and the Amoco Cadiz, much of whose cargo of 223,000t of light crude ended up on the beaches of Brittany in 1978. So far, the largest tanker oil spill in the twenty-first century was the loss of 63,000t of oil from the Prestige, a Greek single-hull ship in Galician waters in November 2002.
Studies of oil spill causes show that groundings, collisions and hull failures have been (in that order) the main reasons for these mishaps. The good news is that the frequency of both large and small spills has been constantly declining since the 1970s and that the aggregate quantity spilled annually from ships has been for many years well below the amount of oil reaching the sea from natural seeps. The bad news is that long-term studies of oil spill sites have shown unexpected persistence of toxic subsurface oil and chronic sublethal exposure with lasting effects on wildlife. Much of this new understanding was gained by follow-up studies of the most notable North American tanker spill, that of the Exxon Valdez in Alaska’s Prince William Sound on March 24, 1989. The grounded ship released only 37,000t of oil but the spill killed perhaps as many as 270,000 water birds and it left many long-lasting effects on marine biota.
Exxon paid out about $2 billion for the oil clean-up and another billion to the state of Alaska, and the costs of restoring the waters and (at least superficially) the rocky shores and beaches of Prince William Sound were thus internalized to a degree unprecedented in previous oil spill accidents. And much higher fines and other compensation payments (totaling around $50 billion by 2017) were paid by British Petroleum after the wellhead blowout on Deepwater Horizon, a semisubmersible drilling rig in the Gulf of Mexico, led to the loss of as much as 620,000t between April and July 2010. In contrast, the Mexican IXTOC 1 well in Bahia de Campeche spilled perhaps as much as 1.4Mt in 1979–1980 without any penalties being paid by Pemex. Fortunately, most of the small-scale spills of crude oil or refined products from coastal or river-going vessels do not overwhelm the natural processes of evaporation, emulsification, sinking, auto-oxidation and, most importantly, microbial oxidation, that limit their impact on surface waters.
Risks of major spills have been lowered by better regulation: all oil tankers of 600 tonnes deadweight and above delivered after July 6, 1996 must have double hulls and double bottoms. What has not changed is the flagging and crewing of oil tankers. Most of the world’s tankers (and other freight vessels) fly a flag of convenience, which means that their ownership and control has nothing to do with the country of registration. Such registrations, now offered by nearly thirty countries (Liberia, Taiwan, Honduras, Belize, Panama, Malta and Spain are the leading flag-of-convenience providers, but the list also includes landlocked Bolivia and Mongolia) provide cover for substandard practices and for evading legal responsibility for oil spills. And the crews are overwhelmingly Asian: the Philippines and India supply nearly half of all officers and 90% of lower level crews.
The Kuwaiti well fires of 1991 were perhaps the most prominently reported environmental catastrophe involving the combustion of crude oil. More than 700 oil and gas wells were set ablaze (it took nine months to extinguish them) and because the very small particles generated by oil combustion can stay aloft for weeks they were carried far downwind: only ten days after Iraqi troops set fire to Kuwaiti oil wells in late February 1991 soot particles from these fires were identified in Hawaii. In subsequent months, solar radiation received at the ground was reduced over an area that extended from Libya to Pakistan, and from Yemen to Kazakhstan. But oil combustion has a much more important effect environmentally, and healthwise, because of its generation of the three key precursors of photochemical smog, carbon monoxide, volatile organic carbohydrates (VOC) and nitrogen oxides (NOx).
Photochemical smog was first observed in Los Angeles in the 1940s and its origins were soon traced primarily to automotive emissions. As car use progressed around the world all major urban areas began to experience seasonal (Toronto, Paris) or near-permanent (Bangkok, Cairo) levels of smog, whose effects range from impaired health (eye irritation, lung problems) to damage to materials, crops and coniferous trees. A recent epidemiological study in California also demonstrated that the lung function of children living within 500m of a freeway was seriously impaired and that this adverse effect (independent of overall regional air quality) could result in significant lung capacity deficits later in life. Extreme smog levels now experienced in Beijing, New Delhi and other major Chinese and Indian cities arise from the combination of automotive traffic and large-scale combustion of coal in electricity-generating plants and are made worse by periodic temperature inversions that limit the depth of the mixing layer and keep the pollutants near the ground.
Introduction of three-way catalytic converters (reducing emissions of CO, VOC and NOx) helped to limit smog levels but their use had to be preceded by production of unleaded fuels in order to avoid the poisoning of the platinum catalyst. By that time decades of leaded gasoline consumption had created high levels of lead contamination in all urban areas with high traffic density. Lead’s phase-out began in the US in 1975 and it was completed by 1990. Methyl tertiary butyl ether (MTBE, produced from isobutylene and methanol) became the most common additive to boost octane rating and to prevent engine knock, and starting in 1995 it made up as much as 15% of the reformulated gasoline designed to limit air pollution. But because MTBE (a potential but not officially listed human carcinogen) is easily miscible with water and leaks had contaminated many water wells, a switch to ethanol began in 2003 and MTBE as a fuel additive is banned in the US.
Combustion of refined fuels generates less CO2 per unit of released energy than does the combustion of coal, but in aggregate they became the world’s largest source of carbon from burning fossil fuels in 1968 when they accounted for about 43% of the total. The share of carbon from liquid fuels rose to nearly 50% by 1974 but during the late 1980s it was basically the same as for coal combustion only to pull ahead once more during the 1990s – but by 2004 coal (thanks to China’s rapidly expanding extraction) was once again the largest source of fossil carbon. In 2015 liquid fuels contributed about 34% of all carbon from fossil fuel combustion, while emissions from coal accounted for about 41%. Unlike solid fuels, whose emissions now come, almost without exception, from stationary sources (potentially controllable by the sequestration of CO2), the bulk of the carbon emissions from liquid products comes from the transportation sector and the only possible control is to prevent their generation. Combustion of every liter of gasoline releases about 2.3kg of CO2 and the rate for diesel fuel is 2.6kg/l.
All of these economic, strategic, health and environmental burdens should be considered in any serious attempts at finding the real cost of oil – but these efforts are exceedingly complicated because of the many assumptions, approximations and uncertainties that are required to quantify externalities (What is the cost of a smog-induced asthma attack?), to answer counterfactual questions (How much would the US Department of Defense save if the Middle East contained no oil, but was still full of Muslim jihādis bent on attacking the US?), and to set the analytical boundaries (Should the entire cost of urban sprawl be charged to gasoline?).
Obviously, these challenges have no definite solutions and hence the estimates of the real price of crude oil or gasoline can end up with totals only somewhat higher than the prevailing price or costs that are an order of magnitude above the current price. An excellent example in the latter category is the study of the real cost of US gasoline completed by the International Center for Technology Assessment in 1998 when Americans were paying just over $1/gallon. Inclusion of tax and program subsidies to oil companies, protection (mainly military) subsidies, environmental, health and social costs (ranging from air pollution to urban sprawl) and other outlays (from travel delays due to road congestion to uncompensated damages due to car accidents and subsidized parking) raised the real cost to between $5.60 and $15.14/gallon. A 2015 study concluded that the cost of atmospheric emissions alone should raise the price of American gasoline by $3.80/gallon.
I am very much in favor of more realistic cost estimates but I must also note that these exercises have many methodological problems and are inherently biased as they do not consider the many benefits arising from the use of these subsidized fuels. Different assumptions and non-uniform analytical boundaries result in incompatible conclusions: do the US oil companies enjoy unconscionable subsidies or are their benefits relatively minor? Does the production and use of automobiles add up to a net benefit or a net burden in modern economies? Ubiquitous examples of unaccounted benefits range from lives saved by rapid transfers of patients to hospitals by ambulances, time saved by flying as opposed to taking trains, or better air quality compared to burning wood or coal. No single answer is possible but the key conclusion stands: prices paid for refined oil products certainly do not reflect their real cost to society.
