Lisa Margonelli: Oil on the Brain

Lisa Margonelli: Oil on the Brain: Petroleum's Long, Strange Trip to Your Tank (2007; paperback, 2008, Random House)

Herb Richards owns an independent gas station in San Francisco (pp. 23-24):

The great postwar boom in autos, highways, and suburbs rolled out on a wave of cheap gasoline, and men like Herb shaped a culture that seemed uniquely American. Cars got bigger and beefier. The average passenger car in 1950 used 627 gallons of fuel a year; by 1972 it was using 754: Fuel economy actually went down. And still, stations were offering anything they could to customers to grab more market share. Herb was giving Kleenex, stamps redeemable for panty hose, hula hoops, and cooking utensils. Self-serve caught on, but in a desultory way. By the late 1960s only 16 percent of stations in the country were self-serve.

And then came the 1973 oil crisis, when Arab oil-producing countries stopped shipping oil in retribution for U.S. support of Israel in the Yom Kippur War. As the price of gasoline rose, the U.S. government implemented a rationing system that caused long lines at stations. Almost overnight the gas game changed and became something else. Drivers stopped thinking of stations as places to get pampered -- the free maps, silverware, and stamps disappeared immediately. Instead, stations were places to get mad. People hated standing in line, and they started to hate going to the gas station. The cost of gasoline suddenly hurt, as did driving those big cars. People read the papers and saw major oil companies' profits more than double from 1972 to 1974. "Obscene profits," said politicians, and most people agreed.

The first oil crisis of 1973 was followed, like a one-two punch, by a second with the Iranian Revolution of 1979. Between 1978 and 1980 gas went from 63 cents a gallon (roughly $1.37 in 2000 dollars) to $1.19 ($2.20 in 2000 dollars).

(p. 77):

People who live near drilling pay a high price for rogue mud. In 2004 oil and gas drilling had fouled the water in at least 241 sites in Texas with salt water, hydrocarbons, barium, mercury, chromium, hydrochloric acid, glycol, and PCBs. Local activists believe that number may be much higher, in part because the Railroad Commission (which regulates drilling) monitors groundwater quality at only 55 out of more than 4,000 disposal pits and because penalties for leaks are usually less than $3,500. "It would be fair to say that for decades, oil and gas drilling wastes have polluted ground water across vast areas of Texas," writes journalist Rusty Middleton, citing thousands of complaints of tainted water from eighty-five Texas counties. Near the town of DeBerry, for example, fifty-five people lost their water supply to benzene, oil waste, and salt water when a driller working nearby disposed of drilling wastes by forcing them into a well, an approved disposal method. Nine years after the first leaks killed peach trees and turned Earnestene Roberson's sink green and oily, the community is still without water.

(pp. 87-88):

Today, he says, most of the "easy" gas and oil has already been gotten from the United States. What remains in big quantities is "unconventional" gas -- the methane that occurs with some coal deposits or "tight" gas, like the Bossier gas, locked into its cage of cemented sandstone. In the late 1980s the federal government and the gas industry put up $165 million to figure out how to get tight gas out of the ground. They ended up finding ways to fracture reservoir rock using explosives and pressurized water deep in the wells. Then, to encourage more drilling for unconventional gas, federal and state governments lifted taxes on it. Worthless gas became profitable, and a boom slowly began. The boom in Fairfield is more and more typical for the country because now "unconventional" gas contributes a third of U.S. production; within fifteen years it will make up half. As natural gas prices have risen, unconventional gas looks profitable. "A lot of our future resources are coming from tough areas," says Dr. Kim. "That requires new technology and state and federal incentives."

When oil is extracted from a reservoir, between 50 and 75 percent remains in the ground. It's likely that better technology would improve that. The International Energy Agency estimates that increasing the world oil recovery rate from 35 percent to 40 percent would result in more "new" oil than all of Saudi Arabia's current fields. Even though studies by the National Academy of Science have shown that oil and gas technology research is a worthwhile investment in future oil supplies, money for it has fallen since the mid-1980s. Major oil companies have abandoned their expensive research programs -- partly because oil prices were very low in the 1990s and partly because the industry restructured to focus on profits. The small companies, driven by bottom-line economics, haven't taken over research. In the meantime, the Department of Energy has invested less in research. In 2005 the Bush administration tried to do away with it altogether. Dr. Kim (whose workplace benefits from government funding) says that politicians are reluctant to spend money on fossil fuel research because it looks like they're offering freebies to the energy industry.

(pp. 88-89):

But whatever I pay for energy, I'll never pay as much as residents of Texas do. It's Texans who give up their backyards to noisy drilling rigs, their water aquifers to possible contamination by drilling; who breathe the air near the refineries of the Gulf Coast. When oil prices fall and people are thrown out of work, they're usually Texans. And whatever benefits the average Texan has received from the state's romance with oil, they've sacrificed mightily and, like the owners of surface rights, without much choice in the matter.

(p. 92):

The Black Giant is empty, but we still live in the world it created. It was so big, and gone so quickly, that it reset the world's center of gravity. As soon as the forty-two-mile-long field started producing, drillers descended, each trying to get the oil out o the ground and sell it as quickly as possible. With the glut, prices fell from $1.10 a barrel to 11 cents, and then to 2 cents. (Comparison: A trip to a Kilgore latrine was going for 10 cents; a hot meal or a shower for 35 cents; and women were selling sex for 50 cents.) It was classic oil economics -- a bottomless supply means oil has no value. What looked like a glut was in fact a slow-motion bankruptcy, because each barrel cost 80 cents to get out of the ground. Worse, the oil was being drawn from the reservoir faster than the water that drove it upward toward the surface was being replaced. The field began to produce less oil and was clearly lurching toward ruin. A disaster of abundance was in the works.

One solution was to limit oil production to stabilize both the price and the pressure in the reservoir, but that was un-American, uncapitalist, and utterly anti-oil as we knew it. It took Texas Rangers, the National Guard, and a Supreme Court ruling finally to determine that shutting in production (or pro-rationing) was something the state Railroad Commission had the power to enforce. The amount of oil coming out of the Black Giant was limited by the government, and prices stabilized. The wildcatter had been brought to heel, and some claimed the independent oil producers became a kinder, less venal lot when they were forced to cooperate. I don't know about that.

The Black Giant started a backlash against waste. Until the 1930s, oil fields disposed of natural gas buy [sic] burning it in flares. Now they began capturing the gas and selling it as fuel, creating the natural gas industry.

Strategic petroleum reserve (pp. 103-104):

During the 1960s Arab oil producers began talking about how to step out of the role of willing and seemingly weak suppliers of oil in order to influence U.S. policy toward Israel. Since 1967 the Arab countries had been discussing whether they could show their power, and change U.S. and British foreign policy in the Middle East, by using the "oil weapon." They decided to punish President Nixon for supporting Israel during the Yom Kippur War. On October 17, 1973, they embargoed oil going to the United States and Britain.

In the melee, the United States lost about 7 percent of its supply, but government allocation programs worsened the shortfall, and Americans soon found themselves standing in line to buy gas. The gas lines incubated a national loss of identity with geopolitical implications. The whole definition of being American was that we drove our cars anywhere we wanted to. Public transit and waiting in line was something communists did. In gas lines, people turned their anger on each other, on the multinational oil companies, and on an imaginary villain named the "oil sheikh," who was usually characterized with an oil can in one hand and a wad of cash in the other, grinning maniacally. The British were horrified by hear an American official speak casually of invading Saudi Arabia. Nixon's government, addled by Watergate, dithered for the five months of the embargo, and the president made a depressing spectacle of not lighting the White House Christmas tree.

(p. 105):

Behind the rhetoric, though, a more effective oil weapon had taken shape. Conservation laws enacted by Presidents Ford and Carter reduced Americans' per capita oil consumption by 23 percent between 1978 and 1983. Coal, natural gas, and nuclear energy replaced oil for making electricity. Cars became 40 percent more efficient, and everything from refrigerators to dryers followed. By 1986 the economy was making every dollar of gross domestic product (GDP) with nearly a third less energy.

And by the time the SPR was ready in 1984, embargoes had become more or less extinct because oil-producing countries began to trade their oil on open markets in London and New York, radically changing the flow and control of oil around the world. Now oil was sold to the highest bidder. Because oil consumers were using less, there was oil to spare. Meanwhile, a concerted effort on the part of the United States to bring oil from non-OPEC nations into the market was bearing fruit. Oil producers could no longer dictate who got their oil and who didn't.

Quote from David Pursell, an analyst at Simmons & Company International (p. 117):

"After 9/11, part of the Bush strategy on terror was to announce that we were adding 100,000 barrels a day to the reserves. Strategically, this was the stupidest thing. This was just political grandstanding, but it sent exactly the wrong signal and it spooked everyone. China, India, Korea, and the European countries panicked and started buying more oil than they needed -- they assumed the U.S. knew something they didn't."

(pp. 130-131):

[Charley] Maxwell says he began to watch the market closely in 1998, when it appeared that production from major non-OPEC oil exporters was starting to fall off. He ticks off the years when countries recorded their highest production: the United States in 1970, Egypt in 1996, Argentina in 1998, Colombia in 1999, the U.K.'s North Sea in 1999, Australia in 2000, Norway's North Sea in 2001, Oman in 2001, Yemen in 2002, and Mexico and China are near their peaks now. These countries are still producing, but, like the drillers in East Texas, they are going for oil that's no longer easy, or cheap to extract.

All of this adds up to a picture of the non-OPEC oil producers in decline, tilting the whole oil supply table back toward the OPEC countries. "You could argue that because OPEC countries no longer have to compete for markets against non-OPEC producers or even the Saudis, they suddenly don't feel the need to invest money to increase production," says Maxwell. "The less they invest, the faster the price will rise. A perverse application of economics." The economically irrational gasoline consumers of the United States are on a collision course with their opposite number -- economically irrational oil producers.

Now Maxwell has issued another warning. It is dense, full of analyst-speak, but it is definite: The days of the Black Giant, the drama of oversupply, are over. "The new basis for doing business -- that is, restrained supplies at higher prices versus virtually unlimited supplies at the lower prices of the past -- will entirely change the structure of opportunities, supplier-customer relationships, the establishment and direction of energy-producing organizations, and the valuations we have historically put on them. After 145 years of [the] petroleum industry, a wholly new one is emerging. None of us has ever seen the like of it before."

Venezuela (p. 143):

According to Spanish law, the oil in Maracaibo belonged to the farmers who owned the land above. U.S. oil companies didn't want to negotiate with the farmers, perhaps because the issue of land claims was a mess in Texas and Pennsylvania, and perhaps because they didn't want the farmers to become an alternative center of power, so they proposed that all oil rights lay in the hands of the state.

The Venezuelan state then consisted of the dictator Juan Vicente Gómez, a nearly illiterate farmer whom the U.S. government had helped gain power. He didn't think of the state as a nation with citizens, but more as one of his farms, with resources and inhabitants to dispose of at his will, and he didn't object to taking possession of the oil underneath them either. And so modern Venezuela was born as a triangle of state and foreign oil company, with citizens as an anxious third. In 1922 the three U.S. oil companies themselves wrote Venezuela's hydrocarbon law.

(p. 165):

As I left Venezuela, it came out that the United States has actually given considerable thought to invading. The Department of Defense labeled Venezuela a "rogue" nation in 2004 and drew up plans for military action should the country pose a "pop-up" threat. According to Washington Post military analyst Bill Arkin, Venezuela's closeness to the United States, and its oil, and the "leftist" nature of Chávez, gave the plans the added strategic priority of being related to homeland security. At the moment, it's hard to imagine that the U.S. public would support an invasion of Venezuela, but what is striking about the plans is how well they serve Chávez. In early 2006 Secretary of Defense Donald Rumsfeld echoed the Venezuelan opposition by comparing Chávez to Hitler. For all its hyperbole, sinister tone, and likely benefit to his opponent, Rumsfeld could have been reading a script written by Chávez himself.

Chad (p. 171):

Nolutshingu calls Chad one of the world's "grey areas" or "strange places" where the state is caught between emerging and disintegrating. Long described as a vacuum by African diplomats, Chad has spent most of its history muddling along in a violent haze with intervention from France, Libya, Sudan, and the United States. During the 1980s, Libya invaded Chad, and a collection of warlords fought back with more than $50 million in military support from the United States. Déby, the current president, is a former warlord who installed himself after a coup in 1990, then held an election in 1996 to legitimize his position.

With only three hundred miles of paved roads and limited telephone service across land three times the size of California, Chad is understudied and unknown. Statistically, it is the tenth poorest country in the world, and 80 percent of the population lives on less than a dollar a day, the official market for poverty. The conventional poverty scale may not be sensitive enough to register just how poor this place is, because I meet several people who are living on less than 25 cents a day,a nd they appear to be no worse off than their neighbors. Chad doesn't even have much of a trader class, and in the scraggly market, it takes me ten minutes to change a Chadian bill worth less than $5.

(p. 173):

Chad's poverty is exceptional, but in the scheme of World Bank investments in oil projects, it's not unusual. Between 1992 and 2004, 82 percent of World Bank investment sin oil in developing countries were for export of that oil to developed countries. This has been a deliberate strategy on the part of the United States, which has more influence than any other country in the Bank, to advance American energy concerns. In 1981, after the second oil crisis, the U.S. Treasury Department urged the Bank to use its "neutral stance" as a "development advisor" to expand into oil projects to "enhance security of [energy] supplies and reduce OPEC power over oil prices." In effect, the Bank became an instrument of U.S. policy, just as the oil companies had been in Venezuela sixty years before.

For more than a decade, this approach put a lot of non-OPEC oil on the market, which kept prices down, but by the late 1990s, it was running out of steam. By 2005 Exxon's actual production was less than it was in 1998. Though non-OPEC oil was still rising by more than a million extra barrels a day every year, about 800,000 of those barrels were from Russia. The yearly rise in non-Russian, non-OPEC oil was around 200,000 barrels a day -- something along the lines of Chad.

Africa, which has more undiscovered oil than anywhere else, has become a key part of U.S. strategy. As the curiously named AOPIG -- African Oil Policy Interest Group -- puts it, "African oil is not an end but a means to both greater US energy security and more rapid African economic development." The United States now gets more oil from West Africa than from Saudi Arabia, and the hope is to get a quarter of U.S. imports here by 2015. Energy is almost the only way U.S. companies invest in Africa -- two-thirds to three-quarters of American investment in Africa is in energy.

(pp. 175-176):

If you are looking to bet on an oil project in an developing country, the odds are clearly against. At Stanford, Terry Lynn Karl's analysis of Venezuela's economy during the 1970s and '80s shows that countries whose economy is dominated by oil exports tend to experience shrinking standards of living -- something that Chad can hardly afford. Oil has opportunity costs: A study by Jeffrey Sachs and Andres Warner showed that of ninety-seven developing countries, those without oil grew four times as much as those with oil. At UCLA, Michael L. Ross did regression studies showing that governments that export oil tend to become less democratic over time. At Oxford, Paul Collier's regression studies show that oil- and mineral-exporting countries have a 23 percent likelihood of civil war within five years, compared to less than 1 percent for nondependent countries.

Iran: In 1988, the US attacked an Iranian oil platform, supposedly a response to a US navy ship being damaged by an Iranian mine in the Persian Gulf; the results of Operation Praying Mantis (p. 202):

The nine-hour fight ended with two oil platforms burned, wiping out 150,000 barrels of oil production a day, six Iranian ships sunk or damaged, one Iranian plane down, and at least fifteen Iranians dead and twenty-nine wounded. Half of Iran's navy had been destroyed. A helicopter accident killed two Americans.

(pp. 203-204):

In the years since 1988, the U.S. military presence in the Gulf has grown from nothing, to $50 billion a year for the 1990s, to a full-scale occupation costing more than $132 billion a year in 2005. By one estimate, the hidden costs of defense and import spending are the equivalent of an extra $5 for every gallon of imported gasoline, a cost that doesn't show up at American gas pumps.

And while Americans question the morality of using force to secure oil supply, not many question whether it is an effective strategy or worth the money. Whether leaders echo Reagan and say force is necessary to prevent long lines for gasoline, or Iraq war protesters shout "No Blood for Oil," the underlying assumption is that displaying force creates an atmosphere of overwhelming power and hegemony, preventing attacks on oil facilities and supply lines. I wondered if this was true, and if it remains a valid assumption as the market for oil has changed.

I came across a mention of Operation Praying Mantis in a 2003 ruling by the International Court of Justice. The ruling, which didn't get much press in the United States, determined that the United States' destruction of the Iranian platforms was not justifiable as self-defense. I thought it was strange that I had never heard of this bizarre one-day war with Iran. I wondered why the attacks weren't better known. "It still hasn't sunk in," said Gary Sick, head of the Middle East Institute at Columbia University and a former member of the National Security Council under Presidents Ford, Carter, and Reagan. "From the platforms, there was an unbroken arc of increasing involvement [in the Middle East] which is not understood by 99 percent of the public. At the end of the game the U.S. has become a Persian Gulf power. We don't have a doctrine, so we've improvised and dug ourselves into a very deep hole. When we talk about the Gulf now, we're not talking about some exotic foreign place, now we're talking about our neighbors."

Nigeria (p. 249):

After [Ken] Saro-Wiwa's death, international journalists pointed out the large number of oil spills in the delta (about six per week) and the sooty, archaic flares that burn off most of the natural gas associated with Nigeria's oil. They noted that soldiers had shot villagers from Shell's company helicopters. A boycott of Shell began in Europe and the United States, "The company stepped back and said why do the communities see us this way?" says the engineer. "The government is AWOL. The communities say we agree and accept this behavior because it allows us to do business."

Any discussion of the relationship between Shell and the Nigerian government inevitably becomes circular and convoluted. Shell's "Human Rights Dilemmas" workbook runs through the issue in different ways, cautioning "Shell is not the government," a phrase that has to be repeated so often because its meaning is so unclear here. Shell is the most robust and identifiable institution in Nigeria. Part of the reason human rights groups blame Shell when villagers are massacred is that Shell at least offers an entity to hold accountable.

But the complex relationship between Shell and the government has much larger dimensions. In 2004 Shell admitted that it had overestimated the size of its Nigerian oil reserves by 60 percent, not only to make its own reserves look better, but to help the Nigerian government increase the size of its OPEC quota.

(p. 252):

She [Hilda Dokubo], and virtually everyone else, blames the end of Nigeria's middle class on the International Monetary Fund's Structural Adjustment Program in the 1980s, which required the government to cut services to qualify for debt assistance. The program is so notorious here that it's routinely referred to as SAP, and as in Venezuela, it is seen as a coup by IMF. "The SAP was when these institutions left, and under [military dictator] Ibrahim Bagangida people fell from the middle class," she says. By 1985 poverty had doubled -- to half the population. By 1996 two-thirds of the country lived in poverty. In 1997 some estimates were that 91 percent of the population lived on less than $2 a day. Encouraged to shrink, the government shriveled up altogether. A succession of military dictatorships survived by destroying whatever institutions remained while stashing billions of dollars in foreign banks. What was left was a void -- a place where the anthill of th state used to be. Hilda dismisses sentiment. "Life has to work, if not peacefully, we must get it with violence."

(pp. 288-289):

Whether measured in dollars or in difficulty, oil will be more expensive in the future, which means the United States needs to change its approach to the stuff. The tools the United States used to exert leverage over oil prices in the past have grown weaker. The special relationships the United States nurtured with countries like Venezuela and the security guarantees offered to Saudi Arabia have lost their appeal and the threats, which include sanctions and military intervention, have lost their effect. The illusion that oil wealth could ensure development or nurture democracy has faded in places as far apart as Chad and Iraq. Oil diplomacy, long outsourced to oil companies, and increasingly to the U.S. military, needs attention and leadership.

With just 3 percent of the world's oil reserves, the United States will be dependent on oil imports for many years. We will need new strategies, one of which could be using deeper cooperation as a route to economic and political stability. Rather than viewing China and India as resource competitors, the United States and the other members of the International Energy Agency could offer guarantees that these growing economies will have access to energy if they are willing to adopt efficient, low-carbon technology. Fostering cooperation between oil producers and consumers is (as the Iranian oil workers mentioned) one way to build zones where the two have mutual interests in peace.

The United States should consider giving up its role as the sole guardian of the world's oil shipping lanes to partner with NATO and Middle Eastern, African, and Asian regional security forces. This strategy can relieve Americans of the burden of paying to police while creating better regional cooperation and combating the trade in stolen and smuggled oil.

Finally, the United States might consider taxing imported oil at the rate of a dollar or two per barrel to create a fund for investing in oil-producing countries. These investments could work with matching investments from host countries and businesses to build infrastructure and create jobs in oil regions where the host government respects human rights. These grants could become a more powerful tool to encourage development than the current strategy of using World Bank loans as "carrots" and sanctions as "sticks." I think there's a strong moral argument for treating the people of oil-producing countries more fairly, but it's also increasingly obvious that the economic stability of the United States is intimately tied to the economic and environmental security of the people who live near the oil wells that supply us.

posted 2008-06-22