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Commentary | PERSPECTIVE ON THE OIL INDUSTRY

Technology Turns a Dinosaur Into Our Energy Future

In marked contrast to the 1970s, the latest threat of Middle East conflict featured lower prices at the pump.

March 06, 1998|DANIEL YERGIN and JOSEPH STANISLAW | Daniel Yergin and Joseph Stanislaw, president and managing director, respectively, of Cambridge Energy Research Associates in Massachusetts, are authors of "The Commanding Heights: the Battle Between Government and Marketplace That Is Remaking the Modern World," published this month by Simon & Schuster. Yergin received the Pulitzer Prize for his 1991 book, "The Prize," about the world oil industry

If Saddam Hussein had held on to Kuwait in 1991, oil would have been at the center of world politics. Much of the world would have been worrying about security of supply, and Saddam would have gained a major call over the world economy. He could have used such an oil position as a very large bargaining chip for achieving his ambitions for hegemony and weaponry.

But he didn't, and the fact that oil has not been central to the current confrontation with Iraq underscores how much has changed in the global oil picture. Not so many years ago, oil meant shortage, gas station lines and international conflict. Today, the picture is quite different: growing supply, a vigorous market and an emphasis on commercial cooperation instead of nationalistic standoffs. All this is reflected in the price. Even in the latest threat of a Gulf military conflict, the price of oil remained lower, when corrected for inflation, than during the oil price collapse year of 1986, and it has declined in the days since the U.N. deal.

Not so long ago, the oil business saw itself as a "sunset industry," doomed to disappear. Today, it has restructured and rebounded as almost a "sunrise industry," vigorously competing to meet growing world demand. At the same time, it is intensifying its efforts to meet environmental demands in every part of the business, from the wellhead to new gasolines.

How did this turn come about? Diversification of supply sources, depoliticization of relations between governments and companies and deployment of new technologies. Underlying all this has been the power of markets to sort out the problems of supply and demand.

On the eve of World War I, Winston Churchill, then first lord of the Admiralty, made plans to switch the Royal Navy from coal to oil, which meant dependence on oil from Persia. The need, said Churchill, was diversification. "Safety and certainty in oil lie in variety and variety alone," he said.

Churchill's dictum has been borne out in the years since the oil crises of the 1970s. At the time of the first crisis in 1973, development in the North Sea and Alaska were just beginning. Today, the North Sea produces more oil than any of the Organization of Petroleum Exporting Countries except Saudi Arabia, and Alaska's output is equal to that of Indonesia or Libya. Production is rising from such countries as Colombia and Argentina. Today the United States draws about 50% of its oil imports from Western Hemisphere sources, compared with just under 40% 10 years ago. Many countries that exported small amounts, if any, 20 years ago are today putting significant volumes into the world market. The waters off West Africa are an exploration hot spot, ensuring that major new production from that area will be reaching world markets after the turn of the century.

The political battles between countries and companies have receded into the past. In the Middle East, oil appears to have become disengaged from the Arab-Israeli peace process, to the relief of most exporters, who are determined to demonstrate that they are reliable suppliers. Around the world, oil-producing countries established that they hold clear sovereignty over their resources. Having done that, they have shifted over recent years to a focus on maximizing revenues rather than struggling over symbols. As a result, doors that were slammed shut to the international industry in the 1970s or the 1950s or indeed in 1917 with the Bolshevik Revolution are reopening. Venezuela is a good example. Venezuela nationalized its oil industry in 1976. In 1996, it instituted the apertura--"opening"--that would permit companies to return, bringing capital, technology and skills. This new policy has been masterminded by the state oil company, PDVSA, which argues that the competition will benefit the nation, as it already has with billions of dollars of upfront investment and a large government "take" on future revenues. Whereas two years ago there was essentially one player in the Venezuelan industry, the state company, today there are 160 stakeholders. Building on this apertura, Venezuela intends to almost double its oil output within the next decade, ensuring that it will be a Persian Gulf country in terms of oil output even if it is not in the Persian Gulf. Many other countries, from Algeria to Argentina, have instituted similar policies. New areas are opening up.

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