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Energy and Geo-Environmental Engineering (EGEE) 120
Oil: International Evolution
Instructor:
Timothy J. Considine
Professor of Natural Resource Economics
Department of Energy and Mineral Engineering
125 Hosler Building
Phone: (814) 863-0801, Email: cpw@psu.edu
Office Hours: Monday-Wednesday-Friday 3-5pm & by appointment
Teaching Assistant:
Rebecca Entler
Email: rge113@psu.edu
Office Hours: by appointment
INSTRUCTIONAL, EDUCATIONAL, AND COURSE OBJECTIVES
This general education course will provide a multi-disciplinary approach to understanding how oil affects international relations and commerce. The relationships between oil technology, social and political institutions, the unique cultures in oil-producing regions will be investigated in case studies. NOTE: Textbooks are optional, the selected readings will be available online.
COURSE DESCRIPTION
Oil is the world’s most important commodity. Access to oil was decisive in the great military struggles of the 20th century. The economic and strategic value of oil has led to the evolution of a fascinating array of business, political, and strategic alliances around the world. The objective of this course is to describe this evolution and the technological, commercial, and political innovations shaping its current face. This knowledge is vital in achieving a more complete understanding of the role of oil in international affairs and economic development.
The course begins with a discussion of the development of the American and European
oil industries during the 19th century and the formation of the first great industrial oil
monopolies. The emergence of oil as a strategic commodity prior to and during World War I will then be discussed. The economic and technological reasons for the recurring boom-bust cycles of oil markets and the political arrangements developed to cope with their effects is the third major topic of the course. The focus then shifts back to military affairs with a discussion of the role of oil in the battles of World War II.
We then examine the social and cultural roots of the post-war dissolution of company
ownership and the nationalization of oil reserves. Also in the policy arena, is a discussion of the policy response of western governments to a growing dependence upon low-cost oil from the Middle East, Africa, and South America. The analysis then focuses on the ideology and strategy behind the formation of the Organization of Petroleum Exporting Countries (OPEC) and the motivations and execution of their strategies to drive up oil prices during the 1970s and 1980s.
The last part of the course discusses the emergence of oil as a commodity traded in open commodity market exchanges, and the relationship between oil policy and the war on international terrorism, the development of reserves in new regions, climate change policy and its relation to fuel switching, and the debate on peak oil.
COURSE OUTLINE
Week 1: Introduction, Rise of American Oil
Chapter 1
20-22: Start of oil in America
26-28: Edwin Drake, oil found
32-34: America's response to the finding of oil, boom towns, etc.
Chapter 2
36, 38-42: Rockefeller, Flagler and his plan
43-44: The Standard Oil Trust tried in court
44-47: Organization of the Standard Oil Trust
53-54: Standard Oil becomes vertically integrated and assumes control of market prices
Chapter 3
57-61: The rise of Russian oil
63-68: The “Coup”
73-77: The founding of Royal Dutch
Week 2: Standard Oil Trust
Chapter 4
80-82: Standard Oil seeming to lose its grip on the market
93-94: Texaco is born
Chapter 5
97-98: Standard has legal woes, begins to face court cases
101-106: The article in McClures exposes Standard Oil's business practices
108, 110: Standard Oil is found guilty under the Sherman Anti Trust Act
Week 3: Russian and Asian Oil Development
Chapter 6
121-123: Royal Dutch/Shell is formed
126: Royal Dutch/Shell is formed, continued
128: Dutch/Shell acquires American concessions
132-133: Dutch/Shell gains Russian acquisition
Chapter 7
140-142: Syndicate of Patriots, Burma tapped for financial backing in Persia
146-147: Persian oil is found
Chapter 8
161-163: Churchhill in the House of Commons
Week 4: World War I and the Rise of Automobiles & Gasoline
Chapter 9
173-175: The conflict between Anglo-Persian and Shell
Chapter 10
188-190: Britain and France's Middle East interests
194-196: America's Middle East interests
Chapter 11
209-211: American culture and gasoline
220-222: Unitizing of oil fields
Week 5: Boom & Bust Cycles
Chapter 12
233-237: Oil in Venezuela and the first real sign of "concessions"
Chapter 13
249-252: Texas Railroad Commission, production control
255-258: Government begins to help set prices, applying duties to oil
Chapter 14
263-265: As-Is agreement
265-268: The companies try and to act to hold prices up
269-271: Shah threatens to take away the concession
271-277: Mexico nationalizes oil industry
Week 6: Oil & Strategy
Chapter 15
299-300: Blue-Line agreement
300-302: Oil is hit in Saudi Arabia and Kuwait
Chapter 16
306-308 Japan's oil concerns before the war
316-319: Oil embargo against Japan
Chapter 17
332-334: Oil and the war in Germany
334-336: Germany strikes Russia, oil being one of the main reasons
348-349: Battle of the bulge and the Germans gaining oil
Week 7: World War II
Chapter 18
357-358: Japanese Achilles heel
359-362: Battle of Leyte Gulf, end of Japanese navy
Chapter 19
371-372: Land-Lease oil for war
377-379: Ickes struggles to increase oil production in U.S.
Chapter 20
395-396: U.S. to eventually become importer of oil
399-401: Government concern over Middle Eastern production growth
402-403: IPC established, petroleum agreement
Week 8: Postwar Petroleum Order
Chapter 21
413-416: The Red Line agreement, formation of ARAMCO
427-428: Oil and politics
428-430: U.S. no longer energy independent
Chapter 22
433-437: Venezuela and the change to 50-50
Chapter 23
456-457: Mossadegh assumes power, crazy
467-470: Mossadegh removed from power
Chapter 24
480-482: Nasser
489-491: Trying to take back the Suez Canal by force
493-495: Oil lift and the end of the Suez crisis
Week 9: The Hydrocarbon Age
Chapter 25
505-507: Japan searches for oil in the Middle East
516: Arab Oil Congress, seeds of OPEC
Chapter 26
522-523: Creation of OPEC
523-525: Early OPEC revealed to be relatively powerless
532-535: Iran vs. Saudi Arabia
537-538: Oil quotas established in U.S. to protect Texas oil men
Chapter 27
543: Coal loses its power position in the U.S.
548-550: Appealing to the consumer in the U.S.
554-558: The Six Day War
Chapter 28
565-566: Britain and U.S. pulling out of Middle East
577-580: Qaddafi takes over Libya and demands higher oil prices
580-582: Leapfrogging prices between Iran and Libya
Week 10: OPEC
Chapter 29
589-590: Nixon abolishes the quotas
593-596: The Arab nations consider using the oil weapon and decide on war
603-606: October War and OPEC's big price raise
Chapter 30
615-617: Oil embargo and gas lines
625-626: OPEC raises prices even higher, to $11.25
630-632: Embargo ends
Chapter 31
634-636: OPEC after the price hikes
648-652: The Saudi and Venezuelan concessions end
Chapter 32
654-656: The nations respond to the embargo
665-667: Oil found in Mexico and Alaska
667-670: North Sea Oil
Week 11: Supply Disruptions, Price Shocks & Oil Market Trading
Chapter 33
687-688: Force Majeure- Iran invokes act of G-d to assume control of oil
689-690: Prices begin to jump rapidly
694-696: Gasoline shortage in U.S.
Chapter 34
701-703: Iranian forces invade the U.S. embassy
711-714: Iran and Iraq war, prices go down a little bit
Chapter 35
717-718: Explains the changes in the oil industry after the Iran/Iraq war
718-721: OPEC begins to lose its grip on the market
730-732: The oil boom begins to tail off and Mexico has financial trouble
Chapter 36
748-750: Internal fighting for OPEC
750-751: The third oil shock
753-755: Bush; the president who knew about oil
Week 12: Politics & Oil and Market Dynamics
Week 13: Climate Change and Unconventional Oil
Week 14: New Oil Provinces and Peak Oil
NOTE: Chapter number aligns with overhead number posted on ANGEL.
INTERCULTURAL AND INTERNATIONAL COMPETENCE (GI) KNOWLEDGE DOMAIN
Specifically, the GI requirement will be met by encouraging students to achieve the following perspectives:
- See nations and cultures not in isolation, but in relation to each other
One of the recurrent themes in the development of world petroleum industry is the diverse regions and cultures involved from the frigid plains of Alaska to the steamy jungles of Sumatra. During the early 20th century oil became a strategic commodity, which set off a world wide search for oil. Importing countries need oil just as much as the exporting countries need hard currency. As reserves decline in the West, the world will become even more interconnected by oil trade flows. The students will gain this perspective early on in the course and in particular as they complete their assignments and team projects.
- Cultivate awareness of the diversity within international cultures.
The oil industry is a fascinating blend of different people from all corners of the world. There are several interesting case studies illustrating this diversity, from the Armenian trader known as “the 5% man” who played a key role in the development of the Iraqi oil industry, the drama played out in Tehran as Mossadegh nationalized Anglo-Iranian, and the turbulent past of Mexico’s oil industry. Each have a different lesson but all share a common thread that cultural traditions are extremely important in understanding the outcomes. Case studies that examine these and other episodes will induce students to develop an awareness of this cultural diversity.
- Convey consideration for different cultural values, traditions, beliefs, and customs.
The evolution of the oil industry is replete with examples of how knowledge of cultural traditions and customs is a strategic asset. Many of the early oil concessions were won with a careful consideration of these traditions. Later on, the nationalization of the many of these arrangements had their intellectual roots in local cultures and emerging nationalism as well as David Ricardo’s concept of economic rent, which was a favorite among Saudi oil negotiators.
The distribution of these rents has in many cases created conflicts between the modern consumer societies that they create with traditional values. The problems that oil wealth create for developing countries was recognized by the oil minister of Venezuela, who was one of the founders of OPEC.
- Increase knowledge about the range of cultural achievements and human conditions through time.
The course is organized along the timeline of development of the world oil industry from its birth during the 1850s to the present. Besides the enormous technological and economic progress during this age of oil, there has been considerable cultural transition from the legacy of colonialism to the rise of nation states that have asserted their sovereignty and ownership of the natural resources. This struggle occurred in a variety of different countries from 1920 through 1970. The nature and policy dimensions of these technologic, economic, and cultural achievements will be examined in a variety of venues from writing assignments to in class debates.
- Be more sophisticated in understanding the nature of stereotypes and biases
The knowledge obtained in this course will provide students with a much deeper
understanding of how large multinational corporations operate in developing countries and how these countries address oil development issues. This pursuit will provide a wide perspective on the role of economic incentives and strategic issues surrounding oil, which will provide a more sophisticated understanding of the nature of common stereotypes in the world of oil, such as wildcat oil driller, international oil deal makers, Arab Oil Sheiks, revolutionaries, OPEC oil ministers, and oil consumers.
- Be able to interact successfully with representatives of other nations & persons of different social groups
The history of commercial oil development, the successes and failures are all the result of deals, often convoluted involving many parties from different companies, countries, nationalities, and cultures. The personal and cultural dimensions of these exchanges are fascinating and will provide students a perspective that will enhance their ability to interact with people from different nations and social groups.
- Increase ability to locate and evaluate information, and to gain knowledge, about other peoples of the world
Many of geologists, engineers, oil entrepreneurs, and traders in the oil industry are avid students of diverse cultures and people. The case studies developed during the course and the team projects that examine oil development around the world will focus on the economic, political, strategic, and cultural dimensions of these areas.
All these criteria are met through the combination of activities that will be included in this course. The team project, in particular, will provide students with opportunities to develop their inductive and deductive reasoning skills.
SOCIAL AND BEHAVIORAL (GS) KNOWLEDGE DOMAIN
Specifically, the GS requirement will be met by encouraging students to achieve the following perspectives:
- Broadly survey the existing knowledge in the discipline
The evolution of the oil industry provides a very interesting platform to survey economic theories and empirical models of how commodity markets function. The early days of the industry closely resemble a workably competitive market with a large number of independent supplies. Later as consolidation occurred and firms exercised market power, the oil market took on the features of monopoly. The course discusses the nature and properties of oil demand, illustrating the law of demand, and also demonstrating how investment in energy using durables,
such as automobiles, eventually leads to demand that is relatively unresponsive to price. In summary, the history of oil provides a very interesting opportunity to illustrate economic principles.
- Develop the student’s understanding of the scientific methodologies of social and behavioral sciences
This course will apply the fundamental economic principles of supply and demand to understand the evolution of oil markets. The basic tools of comparative static economic analysis will be used to understand movements in oil prices. Methods for determining the presence and extend of the exercise of monopoly or market power will be employed during our discussion of the Standard Oil Trust, the Texas Railroad Commission, and OPEC.
- Develop an understanding of the multiple nature of causality in social settings
Oil market developments reflect a multitude of factors, including geological knowledge, engineering advances, economics, politics, and cultural factors. The course identifies and explains the role of each of these factors in contributing to the major events in the industry. For example, the formation of OPEC provides a very important lesson how political, cultural, and economic factors can coalesce and lead to the formation of an economic cartel of sovereign nations.
- Relate with other social and behavioral sciences
While economics will be the core social science discipline employed in this course, other social science disciplines will be employed. For instance, political as well as economic theories of OPEC behavior will be discussed. Also within the realm of political science are the geopolitical strategies of oil and national security.
- Integrate empirical knowledge and theoretical views of the social world
This course will include knowledge about the operational aspects of the oil industry, including the nature of oil production, transportation, refining, and consumption. This level of industry detail provides contextual detail around abstract concepts in economics, such as supply, demand, and market equilibrium. Empirical studies of oil markets with sound theoretical foundations will be discussed to provide students with an understanding of how the unique characteristics of oil supply and demand contribute to market instability.
- Degree to which stated goals of the Social and Behavioral Sciences General Education objectives are met
Criteria 1-5 are taken directly from the “Guide to Curriculum Affairs,” specifically the criteria listed for the social and behavioral requirements. All these criteria are met through the combination of activities that will be included in this course. Assignments and the team project, in particular, will provide students with opportunities to employ socio-economic theories to understand developments in the international oil industry.
GRADING
Evaluation of student performance will be based on the following assignments:
Team Project (20%). Students will be divided into small teams (approximately 4 students per team). Each team will select a research topic that involves an international oil policy and development issue. The entire team will work together to integrate the technological, commercial, strategic, cultural, and political dimensions of the problem. The team will be evaluated on the basis of how well they accomplish this integration. Potential topics include: An historical case study of an oil-producing community; an assessment of the impact of changes in oil production technology on the local economy and social structure; the role of oil in U.S Middle East Policy; and hydrocarbon man in the 21st century. The team project will require a 1-page proposal due September 20th and an 8-10 page final report due November 29th. Grades will be assigned based on the rubric available on Angel.
Students will also be evaluated on the following individual assignments:
Homework & Quizzes (30%). Students’ understanding of the lectures/class discussions and assigned readings will also be assessed through electronically administered and graded quizzes. The quizzes will be designed to assess the extent to which students have integrated the social/historical and technological components of the course. The two lowest grades will be dropped. The dropped quiz grades are intended for any technical problems with Angel or absences; therefore, no exceptions will be made. It is YOUR responsibility to make sure you take the quizzes on a reliable internet connection, i.e. not in your dorm, or frat house, but in a computer lab on campus.
Class Participation (10%) - Students are expected to attend lectures, read all assigned materials, study them well, and be prepared each class period to discuss the readings and participate in scholarly inquiry. An attendance sheet will be sent around the classroom for sign-in after the first week of classes. Students are allowed four absences before the class participation grade is affected.
Examinations (40%). Students will be required to complete midterm and final examinations. Similar to the quizzes, examinations will be administered electronically through the Angel network.
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