By 1800, oil-lamps for lighting were already widely used, thus creating a high demand for lamp oil. This lamp oil was until 1859 mainly derived from relative expensive animal & vegetable oil. And after that “kerosene” which was less expensive. So the high demand for kerosene resulted in that “Colonel Edwin Drake” found oil in Titusville in Pennsylvania in 1859. Then in 1878, the invention of the oil stove had an important effect on the petroleum industry as well. The stove became a commercial success leading to a sharp increase in the demand for fuel oil. But then in the US increased demand for oil, was more than offset by an increased supply of oil. And in 1895 the US was able to export up to 44% of its crude oil production. But when the “T Ford” was introduced in 1908, and the first world war took place, this turned around. And it made the US a “net oil importer” around 1920. Although this changed quickly again because of some major oil discoveries in the US in the early 1920s. Followed by the discovery of the big “East Texas Field” in 1930. But this also caused an oversupply, with an oil price getting to only 0.65 USD bbl (per barrel) in 1931.
The US has been importing crude oil from 1915-1932. But the country was still a “net exporter” because the export of refined products exceeded the crude oil imports. But after the second world war, the US consumption outpaced production again and in 1947 they became a “net importer” again. Until 1955 the US produced more than 50% of the world’s entire oil production. And until 1964 they remained the largest oil producer, but then the Middle East took over. At around 1984 the US oil production was about 18% of the total world production.
The oil industry: Recent history & OPEC
In 1950 the Middle East produced around 1.8 million barrels of oil per day (mmbbl/d), that was about 17% of the world’s production. And this increased to 5.2 mmbbl/d in 1960, by then around 24% of the world production. To protect its own oil industry, the US introduced mandatory import quotas which limited the imports of the Middle East crude oil. This kept the oil price in the US sort of constant, but “non-US crude oil” decreased in value since a major part of their market (the US) was inaccessible due to the quotas.
And as an answer to this, the OPEC (Organisation of Petroleum Exporting Countries) was formed in 1960 by 5 major oil-exporting countries: Venezuela, Kuwait, Saudi Arabia, Iran and Iraq.
In 1970 the US relaxed its import quotas. And after the Yom Kippur war of 1973, in which the price of oil went up significantly, the developments in oil prices were relatively stable after 1974. Oil prices where high and this made it attractive to explore and develop oil areas that were not of economic interest in the past. As a result, major investments were made in new oil areas in Alaska, Mexico and the North Sea. And these areas started to produce oil by the end of the 70s. This resulted again in a large decrease in OPEC production after 1977 as a result of these new areas. Btw, OPEC produced in 1977 the high amount of 31.3 mmbbl/d.
Concerning oil prices, the Iranian Revolution drove the spot price of OPEC oil to 25 USD bbl in 1979. And this resulted in another round of oil price increases to over 40 USD bbl. But these price increases were poorly timed because world demand was falling and many new oil fields outside OPEC were getting more and more operational. Then mild winters in 1982 and 1982 in Western Europe resulted in even more oversupply, and oil-importing countries did not need to buy the expensive OPEC oil anymore. This resulted in that OPEC production was about 15 mmbbl/d in 1985, less than half of its production in 1977 (31.3 mmbbl/d, as mentioned). This had a severe effect on oil prices, and when in 1986 OPEC production went to 18 mmbbl/d the price collapsed to below 10 USD bbl. And since 1986 OPEC attempts to maintain the oil price at the level of the full cost of non-OPEC supply.
The oil companies: Standard Oil
Most of the big oil companies had their origins in the US when the “Drake Oil Field” was found in 1859 in Pennsylvania. The first big company formed was then “Standard Oil” with the financing of John D. Rockefeller. By the end of the 1870s, over 90% of all kerosene was passing through standard oil’s facilities. The company got so big that the whole company “Standard Oil Trust”; consisting out of Standard Oil New Jersey, Standard Oil Ohio etc. etc., needed to be divided. The US supreme court ordered this in 1911.
And the main oil companies as we know (knew) them were formed out of Standard Oil:
- Standard Oil of New Jersey became: Exxon;
- Standard Oil of New York became: Mobil (before merger Exxon);
- Standard Oil of California became: Chevron;
- Standard Oil of Ohio became: Sohio (before taken over by BP);
- Standard Oil of Indiana became: Amoco (before taken over by BP);
- Continental Oil became: Conoco;
- Atlantic Oil became: Sun Oil.
The oil companies: Royal Dutch & Shell Group
Despite early US dominance of the oil industry, there was another major player at the beginning of the 1900s.
The company was Royal Dutch Shell with a background in two companies:
- Royal Dutch;
- Shell Transport & Trading.
Shell Transport & Trading was set up late 1800 by Marcus Samuel, and the company transported kerosene in large quantities to the far eastern market. And Royal Dutch had its origins in the “Dutch East Indies” where for several years oil seepages had been reported. By 1892 Royal Dutch was producing oil with a crazy growth (sixfold increase) in only two years of time. By around 1900 there were takeover attempts of Standard Oil. And in order to resist this Royal Dutch and Shell Transport & Trading merged in 1907. So at the time of this merger in 1907, the oil market was dominated by Standard Oil and Royal Dutch Shell.
In the next blog in this sequence, I will continue by talking about the other companies in the oil industry. And I will discuss oil reserves and production.
And later all the other aspects of valuating these oil companies will be discussed in this sequence of blogs:
- The market for oil;
- Accounting issues for oil companies;
- Valuating “Oil exploration and production companies”;
- Valuating “Integrated oil companies”.
