reasearch paper- oil

8/2/2019 Reasearch Paper- Oil

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INTRODUCTION

Importance of Oil Today

In this fast-paced world full of development, modernization and, unfortunately,

wars, a commodity such as oil is considered the driving power of the world and can never

be abandoned, at least not in the recent future. Oil, also known as the black gold, is used

on a daily basis in every country known without exception. Whenever a country has

factories, transportation, tankers, navy fleets or airports, oil becomes the commodity

that is heavily depended upon for any developing economy. Oil has also a tremendous

impact on exporters of oil, changing the economies of these countries rapidly. The Middle

East is a well-placed example for this rapid development, where oil "has played a seminal

role in the historical emergence of the modern state in the Middle East and North Africa"

(Marcel, p. 14), and is now shaping other national economies such as the United States

and European countries, who are heavily dependent on energy sources. According to the

International Energy Agency (IEA), fossil fuels are proving to be supplying the world with

80.9% of its total energy, with oil taking the lead with about 34.4% in 2006. Without oil,

the world would be paralyzed economically, industrially and militarily, ceasing all types of

development.

(Mt: Millions of tons of oil equivalent)

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History of Oil

Oil was discovered in the early 20 th century in Iran and Iraq, when they were

colonized by the British Empire. The British occupation discovered several oil wells in

1905 on Iraqi soil. However, oil was not an important commodity as it is now, since coal

was the primary use for energy. The turning point in oil's history was before WWI, when

in 1912; Winston Churchill decided that ships should run on oil instead of coal, since oil is


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lighter than coal and produces 3 times the energy. The importance of oil was boosted

after WWII; because most countries wanted to rebuild themselves from the war's

aftermath so they imported large quantities of oil to support their reconstruction. Since

then, commercial oil production took its course, most notably in Saudi Arabia where

commercial production began in 1938. By 1973, especially after the oil embargo, the

price of oil was quadrupled by OPEC, reaching to $3 per barrel, later fluctuating in the

following decades to increasing levels. This will be discussed later in the oil-pricing part.

Effect of Oil on Global Economic & Political Patterns

As mentioned before, oil production has given many nations a new backing to

their economic and political standards. Countries such as Saudi Arabia, who are the

biggest exporters of oil, have seen economic transitions due to the $2-3 billion dollars

they receive daily from their oil exports. Most economic activities in the Arab world are

dragged with the oil production and exportation, so it is no surprise that the Arab

countries are heavily dependent on the primary sector which is mining for natural

resources.

Today, oil is considered a valuable asset in wars and economic development. Due

to the power struggle that is surfacing from the world powers such as the US, China and

Russia, the US has started a chain or wars in order to put their hands on energy

resources to support its domestic needs. Even during WWI, Winston Churchill's

perception that "oil would play a major role in giving the United Kingdom a strategic and

Economic advantage over rivals," is a reflective image of the U.S. policy regarding oil

today (Marcel, p. 17). Afghanistan was U.S.'s first target after the 9/11 attacks followed

by the invasion of Iraq under the excuse for controlling Weapons of Mass Destruction.

This was proved to be a cover-up by the U.S., their real intentions were only to acquire

new oil resources and control part of the world's oil output to its political and strategic

advantage. The U.S. targeted Afghanistan so that it could build a Trans-Afghanistan oil

pipeline that could go through Afghanistan, since Taliban movement refused such a

pipeline to pass through Afghani territory. This pipeline was planned since 1995 in order

to transfer natural gas from Turkmenistan, passing through Afghanistan finally reaching

the Pakistan ports that would be a new output for international markets. Naturally, since

the U.S. seized control over Afghanistan, they would "gain jobs and revenues and

American industry would enjoy the benefits of an additional source of fuel from a friendly

ally," giving them a true motive to invade Afghanistan in the first place (Rall). Since it is

virtually impossible that the U.S. could plan the bombings on Afghanistan in only three

weeks after 9/11, it is clear that Afghanistan was in their plans a long time ago. The

same goes with the Iraqi invasion, only this time it's Saddam Hussein, not Osama Bin


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Laden, who is becoming a "threat" to national security. Again, it is clear that when a new

excuse such as WMDs is being denied by the United Nations Atomic Agency, it is

Afghanistan all over again. The U.S.'s exploitation of other nations always goes with no

consequences, even in the U.N. Bush always threatened that his country will veto any bill

that counteracts with the U.S.'s plans to "spread democracy" or to preserve "national

security".


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OIL & DEMOGRAPHIC CHANGE IN THE ARAB WORLD

As mentioned before, oil can transform and shape any economy that is blessed

with such a significant natural resource. A good example of this is the Middle East, which

is considered the leading region in oil exporting and has the largest oil reserves. Since

the discovery of oil in Iraq in 1905, followed by Bahrain, Saudi Arabia, U.A.E. and Kuwait,

the gulf region was a new important source of oil aside from Venezuela and North

American.

History of Oil-Rich Countries

Oil-rich countries had many problems before oil was discovered. Countries like

Saudi Arabia had a poor economy that was dependant on herding and selling animals due

to the harsh landscape and scarce water sources. Such areas were cursed with low-

standard education and poor government expenditure on roads, schools, healthcare, etc.

However, some of these desperately poor countries "have by this turn of fortune become

wealthy. The uneducated are being educated. In the Middle East, illiteracy will become a

thing of the past in less than a generation" (Duce, p. 629), due to the fact that the

economy has expanded and the need for educated and qualified workers is a necessity.

Governments of these now oil-rich countries have taken the liberty build new schools,

roads and ports while the ceaseless mill of oil trade is stimulated (Duce, p.629). Despite

the fact of the positive effects of the new oil discoveries, the Middle East became a

spectacle of the world regarding its oil supplies, and was targeted by Britain and France

the former major powers, during WWI. After WWI, the disintegration of the Ottoman

Empire was taken advantage of, breaking the gulf countries into regions of control.

France administered Syria and Lebanon while Britain administered Iraq, Jordan and

Palestine (Marcel, p. 17). At the time oil was controlled by seven oil companies who had

total control over oil production. They were known as the Seven Sisters. However, this

changed when the Arab countries decided to fight the Concessions together during the

late 1950s, resulting in some Arab nations forming the Organization of Petroleum

Exporting Countries (OPEC) in 1960.


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Demographic Shifts in Oil-Rich & Oil-Poor Countries

In the past few decades, many demographic explosions within the Arab nations

changed many aspects regarding population, employment and immigration. Many of

these radical changes were oil-based in nature. Countries that were oil-rich were either

low in population or low on qualified employees, but could afford the employment of

foreign labor in order to deal with the technical aspects with not only oil, but within other

important new sectors such as construction companies, transportation plans and

communication networks. Since the discovery of oil, labor forces from the oil-poor

countries that were generally found in the Arab Mashriq were flooding into the oil-rich

countries. This was due to the various economic changes in both the Mashriq and the

Maghrib, which were shifting from the agrarian sector to the industrial sector. As a resultof this shift, the surplus of agricultural labor were forced to find more secure jobs and

better standard of living in oil-rich countries. Along with the immigration of about 18

million ex-patriots into Arab world, countries such the United Arab Emirates have labor

immigrations from multiple nationalities to find a place in the growing oil economy. As a

result, many social changes took place, such as a more democratic system, a more equal

gender role and a less patriarchal system.


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PRODUCTION AND CONSUMPTION OF OIL WORLDWIDE

Oil Companies and Organizations

Nowadays, oil companies are proving to be one of the most profitable businesses

in the world, with large marginal profits that could be worth billions of dollars every year.

Oil companies today are responsible for exploring, drilling and transporting oil around the

world either through pipelines, or through tankers that travel to other continents of the

world. Most people could assume that these oil companies are privately owned

businesses only working to achieve maximum profits for the company and its

shareholders, but they are wrong. While some of those companies are indeed among the

largest in the world, by many important measures, "a majority of the largest oil

companies are state-owned, national oil companies." In other words, national oil

companies hold the "majority of petroleum reserves and produce the majority of the

worlds supply of crude oil." Since most of these national oil companies hold exclusive

rights to exploration and development of petroleum resources within the home country,

"they also can decide on the degree to which they require participation by private

companies in those activities," giving them the upper hand on any other private

companies that exist (Pirog, p. 1). However, this was not always the case. After WWII,

the seven sisters were the biggest seven oil companies during that time, having control

over the prices, regions and drilling equipment of oil. They controlled most of the oil

activities during the mid 20th century. These companies were known as:

1- Standard Oil of New Jersey (now known as ESSO which merged with Mobil).2- Royal Dutch Shell3- Anglo-Persian Oil Company (now known as BP for British Petroleum).4- Standard Oil Co. of New York (was known as Mobil but now called ExxonMobil

after the merge with Exxon).

5- Standard Oil of California (now known as Chevron).6- Gulf Oil7- Texaco (part of Chevron).

After the formation of OPEC in 1960 by Iraq, Iran, Saudi Arabia, Kuwait and Venezuela,

the seven sisters started losing its influence in the oil market, since they lost most of

their shares in the Gulf regions and were in competition of the biggest oil producing

nations having the largest oil reserves. Today, some of the world's leading oil companies

are nation-owned. Because of their close ties to the national government, "their

objectives might include wealth re-distribution, jobs creation, general economic

development, economic and energy security, and vertical integration" to support their

economic prosperity and their labor market (Pirog, p. 1). Now, new oil companies have


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taken over the seven sisters' place as world oil leaders. Below is the ranking, along with

the ownership of the top 10 oil companies:

In addition, the following table shows how state-owned companies produce the highest

share of oil production per day, with Saudi Aramco producing a staggering 1 million

barrels per day, compared to the second company National Iranian Oil Company (NIOC)

which produces less than half that amount.


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Global Consumption of Oil

Global oil consumption has increased by a huge rate in the light of wars and the

industrial race among the world powers. The U.S. is both the world's biggest consumer of

oil, and the world's biggest importer so that it could support its domestic, and military

uses. Notice that despite that the Middle East are the largest producers of oil, they only

consume a small fraction of the total consumption, about 6 million barrels per day. The

oil consumption can give us an overview on the country's industrial capacity as well as its

economic well being. The following table shows each country's consumption:

The US is the third world producer of oil, but this does not cover its demand for oil as it

shows from the graph below. It has to export more than double of what it's producing:


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Oil Pricing

In the past few years oil prices has seen many fluctuations due to different global

factors. In the last few months of 2008, the price of an oil barrel reached $149, creating

a huge quantity of profits for oil companies worldwide. However, oil prices changed in the

past in response to certain events that took place. For example, the graph below shows

the relation of some events such as the Korean War (1951-1953) and the recession in

1958 with relation to oil prices per barrel.


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Another series of price fluctuations took place during and after the 1973 oil

embargo, which witnessed oil prices being quadrupled to $3-$4 per barrel. This year was

market by the Tafra in Saudi Arabia due to the large marginal profits gained by the Saudi

government from oil. Oil prices continued increasing until it reached the $50 mark in

1979. The prices continued increasing until it started decreasing in 1989 due to the

dumping of oil in Saudi Arabia to control OPEC, and due to the Iran-Iraq war in the1980s.

The graph below highlights the main events that pivoted the oil prices from 1947- 2007:


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TECHNICALITIES, METHODS AND EQUIPMENT FOR OIL EXTRACTION

Costs of Oil Production

We discussed the factors that can change the prices of oil, such as events, wars or

political choices. Costs of Oil production are determined by a completely different set of

factors which are more related to the costs of extraction and the type of terrain. In

Some factors might include:

1- How far do the oil wells lie away from the ports? (Transportation costs)2- What is the depth of the oil? The deeper the oil is the more expensive its costs

of extraction are.

3- Whether the oil rig is on land or on sea (Off-shore oil rigs are naturally aremore expensive).

These factors are contribute to the final selling price of oil, thus some oil extraction that

are too expensive and will not achieve the desirable profits are ignored, possibly for

usage as a last resort. This is the case with the oil wells in Alaska, where the company BP

were forced to shut down 12 oil wells due to leakage of oil from the pipelines. This is due

to the extreme tundra conditions which is a difficult environment for oil extraction and

the fact that environmental costs are high, leading to high extraction costs. If the

economic limit of an oil well is exceeded due to higher costs, the oil well is abandoned. In

the gulf areas and the Middle East in general, the oil costs are low since the oil wells are

generally close to ports, and the oil depth is shallow compared to other oil fields. In

addition, most oil fields are found on land not in offshore locations.

Oil Facilities and Transportation Methods

There are many types of oil facilities and equipment which help in discovery,

extraction, refining and transportation of oil, so that the many products manufactured

from crude oil reaches the consumers. In the Middle East, especially in Saudi Arabia, they

are well equipped with the latest facilities in order to provide the huge amounts of oil

they produce daily. Oil extraction begins with finding an oil field, drilling a new oil well,

then using oil pumps to extract the oil. The discovery part does not depend on luck on

finding an oil field; it includes advanced technological equipment that provides the best


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data and analysis for oil drilling. Sound waves called Seismic waves are used to discover

where the oil fields are available, these waves rebound from the deep layers of the Earth

to the receiver who analyses the Seismic data. Another advanced, yet expensive way to

discover oil fields is by using satellites which send back images containing many deep

layers of Earth in order to check new oil fields. Nowadays, fiber optics is used to measure

different temperatures underground, so that engineers know an accurate location of new

oil extraction points. After the oil field is located and the depth of the field calculated the

drilling process starts by drilling a hole from 5 to 36 inches in diameter. The next step is

to insert the casing or steel tubing, which then fits the pipeline network to be refined or

directly stored then exported. Another type of drilling is called Directional Drilling, which

could horizontally drill for oil unlike the traditional vertical drilling method. Some sources

say that Iraq used to steal Kuwait's oil using directional drilling in 1990, which is highly

unlikely since the technology was not available at the time. Today vertical drilling can

reach up to 25,000 feet due to the technological advancement in drilling equipment.

Oil Extraction Process

Then comes the process of oil extraction. A network of pipelines, storage tanks

and reservoirs are built into place waiting for the oil flow. There are three phases of oil

extraction in any oil well, with only the first phase having a natural mechanism. The first

phase, or the primary recovery, the high pressure of oil is exploited while it lasts,

requiring no oil pumps or any artificial means to extract the crude oil. The first process

extracts nearly 5% to 15% of the total oil found in the oil well.

The second phase, or the secondary recovery, only starts when the underground

pressures are becoming weaker and no longer exploitable. External methods are then

required for an artificial mechanism instead of the natural mechanism such as oil pumps

and water or gas injections. Oil pumps, which are also called beam pumps, generate an

artificial sucking power to suck oil out of the Earth. Also, water injection of wells involvespouring water so that the oil levels rise closer to the top, facilitating the oil extraction

process. This phase, along with the primary phase, recovers about 30% to 50%

depending on the type of crude oil and the properties of the underground layers.

The final phase, also known as the tertiary recovery, is mainly a process of

reducing the oil's viscosity for easier extraction. This is done by thermally enhanced oil

recovery methods (TEOR) that uses steam or other methods to heat the crude oil. Other

new tertiary methods now use carbon dioxide flooding, which floods the oil reservoir with

CO2 to increase oil output. This process recovers an extra 5% to 15% in the oil reservoir.


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However, the tertiary recovery is only used if the cost of extraction does not affect its

selling price heavily, meaning that oil extraction will be abandoned if the process is not

conducted profitably.

Oil Refining Process

The third step of oil production, and probably the most important, is oil refining.

Here, many products that we use in our daily lives are produced in an oil refinery uses

the process of fractional distillation to separate different products of crude oil in different

temperatures. Products such as Petrol, Kerosene, Diesel, Asphalt and other extracts are

the main products of this process. The diagram for fractional distillation below shows the

required temperatures for each component.

Unfortunately, this process rarely exists in the Arab world because they do not

have oil refineries. They are only satisfied by exporting crude oil to other countries for

this process. One of the biggest oil refineries in Europe is found in Rotterdam in The

Netherlands, processing about 400,000 barrels of crude oil per day.

Types of Transportation Systems

Oil transportation is a very large business on its own. It ensures that the

worldwide markets have their required quota of oil for each country. Oil transportation

has many branches, ranging from oil pipelines, to land, sea and sometimes air methods

(the latter mainly used for military purposes).

The maritime transportation is by far the most important and the most commonly

used type of transportation. More than 100 million tons of oil is transported daily by oil

tankers, making it the most reliable and highly dependent mode of transportation. As of


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2005, about 2.4 billion tons of petroleum was shipped by maritime transportation, which

is roughly 62% of all the petroleum produced. The remaining 38% is either using

pipelines (dominantly), trains or trucksCrude oil alone accounted for 1.86 billion tons,

which shows the dominance of oil tankers in the last few years (Rodrigue). In the table

below, it shows the importance of each type of transportation system:

Different Oil Qualities

Oil qualities depends on the impurities found mixed with the crude oil, mainly

sulphur. The lower the percentage of sulphur, the better the quality of the oil.


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FUTURE OF OIL & ENERGY SUBSTITUTES

It is a fact that, despite the large dependence on oil in production, industry and

transportation, oil productions will start decreasing dramatically over the next 2-3

decades (not to mention the ongoing wars which also consumes large fuel supplies). The

oil production levels have already peaked, meaning that a decrease in production will

follow. If countries are not prepared for this oil slump in the next few years, the world

will become immobilized when the reserves eventually run out.

Peak Oil Levels and its Consequences

As many scientists predicted, we have already peaked in oil production in many

oil-producing countries, a sign of an international disaster if not dealt with quickly. If the

global consumption is not modified to adapt under these dropping oil levels, "a world

energy crisis may develop, because the availability of conventional oil will drop causing

prices to rise, perhaps dramatically" (Saudi King). Saudi Arabia which has the highest

production levels and largest reserves, are already close to peaking This model proves

that, with the current oil reserves, a decline in oil production is already underway.


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CONCLUSION

The world is about to witness a dramatic change in the near future, a test that will

cause turbulent times in many economies and will certainly cause political and

sociological problems in many nations. The wars raging in the Middle East is an example

of how the U.S. are preparing themselves for this test, forcing their way to new energy

sources to cover the problems of global oil-peaking. If the leading nations of the world do

not act soon to this impending danger, if they do not stop relying on oil and think of new

alternatives, the world will be forced back to medieval ages. OPEC should alert the world

of the oil production declines and OPEC countries should try to resolve their own future

instead of relying on their large, but non-renewable oil reserves. Instead of wasting

resources over wars trying to control energy sources, these resources could definitely be

enough to build a new solution to the new generation and provide a clean, renewable

energy source.

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