Power Plant Engineering

HISTORY OF OIL
Though oil has been known for thousands of years, the first modern commercial drilling and
production of oil is usually said to have begun in 1859 in the US, when Col. Edwin L. Drake sunk a well
in Pennsylvania near some natural oil seepage and within a few years it was in widespread use through-
out the US. The producers, weakened by overproduction, were gradually taken over by the refining and
distribution companies led by Rockefeller’s Standard Oil Trust. Standard Oil dominated the oil industry
in the US until, under anti-trust legislation, it was ordered in 1911 to divest itself of all its subsidiaries.
Of the 38 companies in the group, three companies, Exxon, Mobil and Socal took a major role in the
world oil market. Together with four other major companies Gulf, Texaco, Shell and BP, these seven
companies (the ‘Seven sisters’) dominated the world oil scene throughout the first half this century.
During the 1920s and 30s, there was a period of intense competition, with a threat of over pro-
duction aggravated by new discoveries in Mexico, Venezuela, Sumatra and Iran and a fall in demand
during the economic depression. The major international oil companies led by Exxon, Shell and BP
developed in 1928 a secret agreement to accept their current volumes of business, to decide jointly the
shares in future increases in production. The resulting cartel continued until it was terminated by anti-
trust in the 1940s in the US. Throughout this period the prices paid for crude oil were determined by
negotiation between oil companies and governments in producing countries. This procedure continued
into the 1960s, but by that time the continuing discovery and development of large low cost oil supplies
in the Middle East had led to a post war decline in the price paid to producing countries. In an attempt to
halt this decline, a group of producing countries, viz., Iran, Iraq, Kuwait, Saudi Arabia and Venezuela
whose GNP was substantially dependent on oil income, formed OPEC, the Organization of Oil Export-
ing Countries.
The foundation of OPEC in 1960 was seen as a defensive measure by the producers following a
unilateral reduction by Exxon of the posted price they would pay for the supplies of Middle East crude
oil, which was followed by other major oil companies. The five founder members of OPEC were at that
time responsible for 80 percent of internationally traded crude oil. Intervention by governments in the
activities of oil companies in their countries had begun dramatically in Mexico in 1938, when all oper-
ating companies in their countries were nationalised. Much earlier, in 1913, to ensure oil supplies for the
UK Navy, Churchill has taken control of BP (then Anglo Persian) but UK rarely involved in commercial
management. In 1938, under threat of nationalisation, Venezuela, then a major exporter, obliged the
major companies (Exxon, Shell, Gulf ) to increase their royalty payments, and ten years later in 1948, it
successfully implemented a law giving the Venezuelan government a 50% share in all profits. This
profit sharing arrangement was soon demanded elsewhere and in the 1950s and 1960s it was adopted in
most oil producing countries.

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NON-CONVENTIONAL ENERGY RESOURCES AND UTILISATION
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In 1973 the world oil outlook changed dramatically, following an embargo imposed by the Arab
members of OPEC on countries that they believed were providing assistance to Israel at the time of the
1973 October war between Israel and her neighbors. By coincidence, at the same time OPEC ministers
decided to raise the oil price from $3 to $5.12. The day following this announcement in Oct. 73, the
Arab members (OAPEC) agreed an immediate 5% reduction in oil production. Subsequently, the inter-
national oil price rose to $20 a barrel by Dec. 73. Shortly after this OPEC increased the oil price to
$11.65 per barrel, giving a five-fold increase over the price two years earlier. After this the price de-
clined gradually in real terms, due to inflation until late in 1978, when once again the spot market rose in
response to local scarcities on the interruption of Iran’s oil production. Following the lead from the spot
market, OPEC began to move posted prices upwards again.