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The inequitable distribution, ownership and consumption of crude oil provide the foundation for international competition, alliances and conflicts. Oil is the most voluminously traded commodity worldwide owing to its concentrated energy output, its versatility as a feedstock for essential industrial, agricultural and domestic products and its well established infrastructure for global transport, distribution and processing. Oil is one of the “Big Three” fossil fuels along with coal and natural gas that together account for 80% of the energy consumed worldwide to power the global economy. The earth simply could not sustain 6.5 billion people without it.

The term “Middle East” originated during the Suez Canal crisis in 1957 when U.S. Secretary of State John Foster Dulles used the phrase in defining the Eisenhower Doctrine to include… “the area lying between and including Libya on the west and Pakistan on the east, Syria and Iraq on the North and the Arabian peninsula to the south, plus the Sudan and Ethiopia.” The Middle East is strategically located at the historic cross-roads of the world and remains today a sensitive and important geopolitical region economically, politically, culturally and religiously. However, in this article, the Middle East will refer primarily to those nations surrounding the Persian Gulf.

The Emergence of Oil as the Driving Force in the Middle East:
On January 10, 1901, an “oil gusher” “came in” near Beaumont, Texas in a well drilled atop a salt dome called Spindletop. The well was soon flowing 100,000 barrels of oil a day setting off the “Texas Oil Boom” and a frenzied search for more that spread around the world. Nothing like the amount of oil found at Spindletop had ever been seen before. The U.S. soon became the largest oil producing nation on earth. Two famous oil companies, the predecessors of Gulf Oil and Texaco, now part of Chevron, were born at Spindletop to develop the oil.

But, oil exploration and development was to be interrupted or otherwise suppressed periodically in the next half century by major global events. In the early part of the twentieth century, success in finding oil outstripped the growth in demand and oil prices plummeted.

Just ten years after Spindletop, the first Middle East oil was discovered in the nation of Iran in 1911 by a British company, the Anglo-Persian Oil Company (APOC). Then, World War I (1914-1918) broke out and threw Europe, the Middle East and other parts of the world into chaos. Following the war, the British discovered oil in Iraq. But, further oil exploration in the Middle East was slow to develop until late in the 1920s, just before the region was plunged into economic chaos by the Great Depression that began with the New York stock market crash on October 29, 1929 (Black Tuesday) and rapidly spread around the world. The new Iranian government of Reza Shah Pahlavi revoked APOC’s concession in 1932 in the depths of the depression. Although the Shah and the British eventually agreed on new terms, the threat of losing Iranian oil inspired the British to search for other sources of oil in the small coastal states of the Arabian Peninsula with whom they had long standing treaties. That precipitated competition between Britain’s historic influence in the region and the American oil company representatives who had come to the Middle East in the late 1920s looking for oil.

Standard Oil of California (Socal), now Chevron, was to play a pivotal role in the future of Middle East oil. Socal was a product of the 1911 U.S. Supreme Court break-up (under terms of the 1890 Sherman Antitrust Act) of the Standard Oil Trust, founded by John D. Rockefeller on January 10, 1870 in Ohio. Socal geologists began exploring for oil in Saudi Arabia in the late 1920s and, finding promising areas, initiated negotiations with the Saudi government in 1932 for an acreage concession (a defined geographic area with exclusive rights and specific terms). The negotiations started the same year that APOC had its concession withdrawn by the new Iranian government and the year that Socal discovered oil in Bahrain, a small island archipelago nation of 33 islands off the east coast of Saudi Arabia in the Persian Gulf. Socal was finally granted a concession from the Saudi government in 1933 and, soon thereafter, began exploratory drilling along the east coast. Three years later, in 1936, having found no oil, Socal was becoming discouraged and sold 50% of its interest in the concession to the Texas Oil Company, later to become Texaco, now part of Chevron. The new company was named the California Texas Oil Company (Caltex), a joint venture that endures to this day under the name Caltex operating throughout the Pacific Rim and Europe. I worked for Caltex Pacific Indonesia for three and a half years in Jakarta. Texaco was acquired by Chevron in the year 2000.

The 1930s, the years between the Great Depression and WW II, saw intense oil exploration activity in the Persian Gulf region with U.S. oil companies competing with British interests for acreage concessions. Britain had signed treaties with a number of small coastal Sheikdoms between 1820 and 1920, primarily to protect commercial shipping, and projected considerable influence in the region to restrict foreign access.

Commercial quantities of oil were not discovered in Saudi Arabia until 1938 and the first oil produced was exported by barge to Bahrain where Socal had already built an infrastructure for shipping oil to foreign markets. The first tanker of oil was exported from Saudi Arabia in 1939. And then, operations in the region were interrupted once again when World War II broke out on September 1, 1939 with the German invasion of Poland.

Following WW II, Socal and the Texas Oil Company resumed oil exploration operations in Saudi Arabia. Those efforts resulted in the discovery of the Ghawar Oil Field in 1948. It remains today the largest conventional oil field ever found (170 miles long by 19 miles wide) and has produced more than 65 billion barrels of oil. The field is estimated to currently produce over 5 million barrels of oil per day along with 2 billion cubic feet of natural gas. Oil production in Saudi Arabia is operated by Saudi Aramco and the technical information on the field, its remaining reserves and producing capacity, are closely guarded secrets.

Realizing that the volume of oil discovered at Ghawar exceeded their financial and operational capacity to fully exploit and desiring to spread their risk, the two companies sold 30% of their 50% interest to Standard Oil of New Jersey, the parent company of the Standard Oil Trust, now ExxonMobil, and 10% to Socony Vacuum, later Mobil and now part of ExxonMobil. The new partnership became the Arabian American Oil Company (Aramco) with Chevron, Texaco and Exxon each holding a 30% interest and Mobil, a 10% interest. Production began in 1951. Ghawar alone accounts for more than half the cumulative oil production from all of Saudi Arabia. Saudi Arabia also boasts the largest offshore oil field in the world, the Safaniya Field under the Persian Gulf. It began producing oil in 1957.

In spite of the early successes in Iran, Iraq, Bahrain and Saudi Arabia, oil riches were slow to come to many of the Middle East nations because of delays imposed by World War II. Smaller nations, dependent upon Britain, did not begin to enjoy the oil riches until the 1950s. Kuwait was the first nation in the region to develop its oil resources and became the largest oil producer by 1953. Oman did not export oil until 1967. Abu Dhabi began exporting offshore oil in 1962 and Dubai in the late 1960s.

The Origin of OPEC (Organization of Petroleum Exporting Countries) and the Emergence of Self-Determination:
By 1960, the oil exporting nations in the Middle East decided they could project more influence organized as a single entity than individually. So, OPEC was founded that year in Baghdad, Iraq by four Persian Gulf states plus Venezuela. The founding members included Iran, Iraq, Kuwait, Saudi Arabia and Venezuela. Other countries that joined later were Qatar in1961, Indonesia in 1962, Libya in 1962, the United Arab Emirates (UAE) in 1967, Algeria in 1969, Nigeria in 1971, Ecuador in 1973 (suspended from December 1992- October 2007), Gabon in 1975 and Angola in 2007. Gabon terminated its membership in 1995 and Indonesia suspended its membership in January 2009, leaving the current membership count at twelve.

Western oil companies owned and managed the oil industry in the Persian Gulf region until the 1970s based on concessions that were negotiated in the 1930s and later before much oil had been found and at a time when the Arab nations were in a weak bargaining position dependent upon western funding and technology to find and develop their oil resources. Accordingly, the price of oil had remained stable at about $3.00 a barrel for years. In the 1950s, typical terms between the governments and the Western oil companies included 50% of the oil profits and a royalty fee. But, as the extent of the oil became better known and understood by the Arab governments, they began to buy major shares in the oil companies and, by the 1990s, many of the nations took over complete ownership of the oil with negotiated compensations to the previous owners. In most cases, the former owners stayed on in various management and technical support roles based on negotiated contract terms.

A number of factors contributed to the emergence of self-determination by the Middle East oil exporting nations that led to the nationalization of Western interests:

• The British withdrawal from the Arabian Peninsula in 1971 ended their 151 year presence as a stabilizing influence in the region. The British left behind the United Arab Emirates, seven states bound by truces dating from 1820 and 1892. The British granted internal autonomy to the seven Sheikhdoms following World War II and negotiations began in 1968, when Britain announced its intention to withdraw from the region, to form a federation that resulted in the founding of the United Arab Emirates.

• The Arab-Israeli War of 1973 that placed Western and Middle East interests in direct conflict.

• The growing dependence of Western nations on Middle East oil and the realization by Arab governments that they could ration the oil supply through OPEC to achieve both political and economic interests.

So, with membership at about a dozen of the largest oil exporting nations on earth and growing control over their own destiny, OPEC first employed oil as a geopolitical weapon with the 1973 Arab Oil Embargo in retaliation for American and other Western countries’ support of Israel during the Yom Kippur or Arab-Israeli War, October 6-25, 1973. That pivotal event set the stage for future oil price volatility with the quadrupling of oil prices and forever changed the balance of power in the world between the oil exporting and the oil importing nations. Governments around the world were shocked into the realization that a commodity so essential to their internal economic stability, their national defense and standard of living could be withheld by those who own it to achieve a political or national interest objective. Oil is being employed as a political weapon here in America as well by the environmental lobby through their political activism and funding to restrict domestic development against those in favor of developing domestic energy resources to lessen dependence on foreign oil and reduce the trade deficit.

Who Owns the World’s Oil Reserves?
Contrary to popular belief, the heads of the four or five largest publically owned oil companies that are routinely hauled before House and Senate subcommittees to testify before live television audiences every time the price of gasoline spikes to some threshold level of consumer pain, have no control over the price of oil. The implications of “price fixing” by “Big Oil” are ever present. The “blame game” plays well to the “constituents back home,” and perpetuates the urban legend of the greedy oil barons. But, the investor owned energy companies such as ExxonMobil, Chevron, Shell, British Petroleum and Conoco combined own only a tiny fraction of the world’s oil reserves.

There is no private ownership of oil in most of the oil rich nations of the world. Rather, the oil is owned by the governments of those nations through state-owned oil companies. The OPEC nations alone own almost 80% of the proven conventional oil reserves in the world, excluding the non-conventional oil such as that being strip mined in Canada’s Athabaska Oil sands located in the western province of Alberta. Combine that with the non-OPEC oil producing countries such as China, Russia, Mexico, Kazakhstan, India, Brazil, Indonesia, and all the small countries in South America, Asia, Africa, etc. where the oil is either wholly or partially owned by the governments of those nations and there is little oil left in the world for private ownership.

In the U.S., private ownership of oil is achieved by leasing mineral rights from federal, state and private owners with royalty payments to the mineral owners ranging from 12.5% to 25% of the value of the oil and/or natural gas produced. Boil it all down and American energy companies, numbering several dozen, own probably less than 10% of the oil reserves in the world. There are federal laws with heavy penalties for conspiracy to “fix” prices on anything. Imagine trying to secretly organize the several hundreds of people in the upper management ranks of several dozen energy companies who collectively control only about 8% of the oil in the world to “corner the market” by fixing oil prices, trade by trade, day by day, in several Mercantile Exchanges around the world all the while managing to keep the illegal activity secret and staying out of prison.

Sound impossible? Well, actually, it is!

A Global Energy Perspective:
The current proven worldwide oil reserve is estimated at 1.2 trillion barrels and the Middle East alone accounts for more than 56% of that amount. Current worldwide oil consumption is about 85 million barrels per day or 31 billion barrels a year. ExxonMobil has just released its “Outlook for Energy: A View to 2030”. The company predicts that global demand will rise by 35 percent by 2030 compared to 2005. Energy consumption in the developing nations will rise more than 70 percent. Natural gas will overtake coal as the second-largest global energy source behind oil and serve… “as a reliable, affordable and clean fuel for a wide variety of needs.” The energy outlook points to growing energy demand globally which reflects improving living standards for millions of people and growth in global energy demand would be far higher without projected improvements in energy efficiencies.

The OPEC nations, with almost 80% of worldwide proven oil reserves, provide the oil for about 40% of daily consumption. The corollary to that is the non-OPEC oil producing nations, with only 20% of proven oil reserves, provide 60% of daily oil consumption. The math is disturbing! The non-OPEC nations are exhausting their oil resources at a much faster rate than the OPEC nations. American consumers will one day rue the time that their government chose to tilt at windmills catering to special interests rather than fabricating an enlightened National Energy Policy.

Saudi Arabia is the key member of OPEC, having the largest oil production and the largest excess producing capacity. It can play the role of “swing producer” and set the tone for OPEC production quotas to achieve a targeted oil price range. However, OPEC loses control of oil pricing when demand plunges, as during economic recessions. They realize as well that it is not in their best economic and political interests to artificially drive the price of oil sufficiently high as to suppress global economic growth and to invite large scale competition from nonconventional energy sources. Oil prices can also spike out of control with a threatened or actual supply interruption as is the case with the Egyptian turmoil with potential implications for the security of the Suez Canal.

But, that is another story!
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Permission to reprint this article in whole or in part is hereby granted, provided the following credit line is used: “Reprinted by permission from The Voice of North Carolina, Ltd. www.voiceofnc.com, a publication of the Voice of North Carolina, Ltd. and Charles Saint James Publishing.”

Biographical Sketch:

Click on Charles Holbrook in the left side bar for other articles and a biographical sketch.

5 Responses to “HISTORY OF OIL IN THE MIDDLE EAST & IMPLICATIONS”

  • Rod Ward, Pinehurst says:

    Wow. This should be a primer in all schools. Secondly, a must read for our congress for their collective edification on a burgeoning National emergency. The Middle East alone can do with their control of oil what the Russians only hoped they could do with military might; control our destiny and dominate without question.

  • JD Zumwalt - West End says:

    Thank you. This is an excellent history; very well organized so the reader can easily understand this extremely complex subject. Now, what do we do with this information? I am afraid I have become so skeptical that I do not believe our elected officials will ever take the time to understand. Those who do understand ignore the information in the interest of a better sound bite. They (as the article pointed out) need scapegoats, and what better scapegoat than a rich old man? As Mr. Holbrook alluded to – more times than not (ironically) it is in the best interest of the true power players in the oil industry to keep prices lower. Last comment – Those who believe the big companies illegally conspire against us give these companies way too much credit in the competence department.

  • Bryan Ward , Haysville Kansas says:

    “American consumers will one day rue the time that their government chose to tilt at windmills catering to special interests rather than fabricating an enlightened National Energy Policy.”

    This is a brilliant article and insightful statement ( above ) from the article. I have worked in the Supply Chain side of energy exploration for 6 years now. I have been involved with fabrication, supplier development, field operating processes and now am involved with developing critical path processes for efficiency of field related processes and training cirriculum where the “hands” are trained to perform – hence world class competency. Ignorance, special intererst and political angle is no excuse for the american to educate themselves on the timeline that Mr Holbrook has explained here. Great work !

  • Sara, Florence says:

    Thank you for such a clear and concise history. I must have read 20 articles on the subject today and yours outshines them all. I agree with Rod’s comments that this information should be required reading in schools…and Congress.

  • admin says:

    Thank you so much, you made my day!

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