Some words about the past and the future of oil
Ask Google about the discovery of oil. It will tell you that oil was discovered in 1859 in northern Pennsylvania. This is not exactly true.
What took place in 1859 marked the beginning of the modern history of oil but the world had flirted with oil for about 4000 years, with different levels of success. We could learn much from this torrid romance.
Oil before our time
Babylonians, Byzantines and Greeks all knew that petroleum oil could ignite! We also know that oil was used in lighting at least as far as on 4,500 BCE. And yet, when lamps popularised in Egypt by the Ptolemaic (beginning 305 BCE) and Roman (beginning 30 BCE) periods, the fuel of choice was olive oil rather than petroleum oil. Why?
Technology [or the lack thereof], of course. That is always the easy answer. But in what way?
The answer is that there were five challenges that oil had to overcome before becoming useful to humanity. I call these challenges the 4A+A (availability, accessibility, acceptability, adaptability, +affordability) (cf. APERC).
There were two main problems regarding the use of oil in early lighting:
- Petroleum oil was less available than olive oil because the only way to obtain it was to wait for it to erupt from the ground. Basing a relatively widespread technology such as lighting on petroleum would have faced the very basic problem of simply not having enough fuel.
- Oil was not as easily adaptable as olive oil because it spurs from the ground as bitumen, a gooey substance rather than as a liquid. Liquid fuels are relatively easy to transfer from storage into usage. Today’s technology is based on hoses, pipes, furnaces, combustion engines and so forth. Lamps of the time used wicks. Bitumen is too thick for wicks.
This would eventually change about a thousand years later thanks to the process of distillation [probably] developed by the Arab alchemist Muhammad ibn Zakariya Razi –Al-Razi — by the end of the 9th c. CE. In a nutshell, distillation purifies bitumen and converts it into a liquid fuel (he called kerosene). By doing so, Al-Razi made oil adaptable to lighting.
However, Al-Razi also focused on enhancing the acceptability of petroleum oil by paying attention to it being ‘safe to light’. To date, safety is one of the biggest concerns when it comes to fuels such as kerosene, diesel, or gasoline. You would certainly not be keen to fill your tank if gas tanks exploded easily.
By the 12th century CE, kerosene was such a basic commodity that it could be easily purchased in the streets of Damascus. This developed an entire industry, of which we have evidence from none other than Marco Polo himself:
To the north lies Zorzania [Georgia], near the confines of which there is a fountain of oil which discharges so great a quantity… In the neighbouring country no other is used in their lamps, and people come from distant parts to procure it.
Whilst perhaps tiny in comparison to that of today, the Golden Age of Islam saw the emergence of a booming industry thanks to distillation’s ability to find synergies between the solutions given to the challenges of adaptability and accessibility.
But if synergies can be found, the opposite can also happen. As it did when kerosene lamps faded in parallel with the decline of science in the Middle East. This was of course, greatly, due to accessibility. The demise of the early Islamic oil industry is the result of a combination of challenges to accessibility that increased transaction costs to the point that even the exchange of knowledge became nonviable — let alone the trade of oil. But political accessibility alone does not explain why Europe did not develop its own oil industry. Because, as it turns out, Europe had oil. Oil seepages were mentioned in a book written by a polish Jesuit in 1721 in a way that evidences centuries-old knowledge of oil.
Why did an European oil industry not develop then? After all, European merchants must have ran into a kerosene lamp at some point. In addition, Al-Razi’s work, whilst obscure, was within the reach of some elite Europeans. And, in fact, there are various examples of distillation having been achieved in Europe during the middle ages.
In Europe then, oil was thus available, accessible, adaptable, and [potentially] acceptable. However, given the size of the market and the costs involved, oil was just not an affordable investment in the Europe of the time.
In other words, you could, as an individual, travel to somewhere in Europe and procure your own oil, then bring it home, then distill it by yourself, then build a lamp, and then sit down and read a book (or a scroll, actually, as there were no in Europe for most of this period). But you would need to do it yourself because no one else was going to do it for you given that they would have incurred in losses.
There is no need to take my word for it. Some tried. And they tried hard!
This was the case, for example, of Joseph Hecker (cf. Frank & Forbes). In 1810, Hecker found a promising source of oil in the Galician region — specifically in the town of Drohobycz (modern Western Ukraine). Hecker knew how to distill and found that he could convert 40% of this oil into kerosene. This enabled him to get a contract to provide the fuel for Prague’s lighting in 1816. Unfortunately for Hecker, he was forced to default on his contract due to a combination of complications in the amount of oil his well yielded (availability) and transportation (accessibility). Technically speaking, Hecker could have dug more shafts. Financially speaking, however, that was the end of it.
The Middle East was inaccessible due to political reasons. Hecker had the bad luck of running into compounding of challenges of availability and accessibility. The end result though, the same. Whereas Al-Razi’s story shows that synergy can be found between ‘A’s, Hecker’s shows that the opposite can also happen. Imbalances between different ‘A’s can decrease the competitiveness of oil by means of creating risk and/or uncertainty that thereby prevent, or significantly challenge, the solution of the full 4A+A.
I would not want to leave you with an unfinished story, the situation started to turn around with the Galician re-discovery of distillation and the re-invention of the kerosene lamp. In 1852, Ignacy Lukasiewicz, a pharmacist from Lviv, a town neighbouring Drohobycz, perfected the process of distillation developed by his mentor Jan Zeh. They recruited a local tinsmith, Adam Bratkowski, to help them build a kerosene lamp. The men soon got in touch with Lviv’s hospital, where their kerosene lamp enabled the first night-time emergency surgery in history, in 1853.
Similar stories were unfolding elsewhere. The Absheron Peninsula, home to Baku and part of Tsarist Russia in the mid-1800s, saw the first attempts to drill for oil using earth augers. Russians dug to a depth of 21 metres in Absheron in 1948, the same depth that Bissell and associates would reach a decade later in Pennsylvania. Nonetheless, the gains in availability were offset by long distances and stringent tax policies.
Finally, the definitive oil-meets-entrepreneurship event took place in Titusville, Pennsylvania, in 1859 when Bissell and associates joined into the Pennsylvania Rock Oil Company. Oil was struck at a depth of 69 feet (21 metres) on August 27, 1859. The well is said to have yielded somewhere between 20–35 barrels a day, which sold for about $20 per barrel (cf. Tarbell& Robinson). Bissell’s use of salt drilling techniques to extract large oil quantities (availability), their proximity to markets (accesibility), the market desire for a substitute for oil and lard oils (acceptability), and the ability to distill oil (adaptability), all came together to improve the affordability (+A) of oil extraction.
The lesson forgotten
The ability to solve the 4A+A in an integrated manner proved to be the key to the success of the oil industry. Not once. Twice. And that is just in the period of time covered in this article. You can find plenty more examples in the study about the future of oil from which this article derives. The bottom line is, either you solve all these problems in parallel or you lose to those that do.
And yet, some think that oil’s current crisis can be solved through uni-dimensional thinking. They go around telling everyone that there is a single recipe to make it easier for everyone in the industry to profit (spoiler alert: there is no such thing). If only we make it easier for business to compete, they say… “that” will solve the crisis.
In a way, it will. Nothing wrong with some good old competition. I myself fully support ending subsidies across all types of fuels. Recently quoted as representing over US$5.3 trillion by the IMF, subsidies are the worst market disparity we can think of when it comes to energy. Focusing on other type of regulations first is nothing other than hypocrisy.
Once you remove subsidies, though, you run into the problem that further deregulation is not automatically wise. It does not matter how pro-market you are, you would not allow airplanes to fly without properly attached wings, would you? Why is the idea of allowing drills to operate unrestrained not problematic? Surely there ought to be some rules of nature that apply. We can debate about what these rules are, of course. But foreclosing discussion to pursue deregulation for the sake of deregulation evidences a deep misunderstanding of reality.
But let’s raise our own burden of proof and assume that further deregulation actually lowers costs without forcing everyone else in society to incur in unacceptable harms/losses. Even if we do think in this way, the idea that less costs equal more margins for everyone in the oil industry is ill-founded.
In a context where the industry has already been improving its technical and operational efficiency, the additional input deregulation can bring refers the costs of managing social, political, and environmental risks. But this is also likely to lead to increased availability (because one could drill in riskier locations, e.g. Arctic) whilst at once reduce acceptability (because one could drill with riskier techniques, e.g. tar sands). Given the above noted 4A+A dynamics, the risk of widespread financial struggle cannot be ignored if these two things happen at once.
It is true that regulation oftentimes gets in the way of business. But the idea that regulation is THE core of the problems for the modern oil industry is naive. The industry is entering a period of rather brutal competition, both within itself as well as against other sources of energy. It is suffering with current regulation and it will suffer even if deregulation is taken to its most ludicrous extreme. If you are in the business of oil, you should care because it is your future that is at stake. If you are not into oil, you should care because widespread financial struggle is likely to be accompanied by a concerning problem of mismanaged stranded assets.
At US$5.3 trillion a year, the world literally could not subsidize energy more even if it wanted. It is time to bite the bullet! Competition is indeed the only way out. But thinking that the oil industry can come out unscathed by keeping its subsidies whilst deregulating elsewhere is naive. Because it can, evidently. But it will solve nothing. The real solutions lie on thinking about how to solve all 4A+A elements in parallel, which is something that is not happening at the moment.
My advice to ignore? Honestly. Just be better. If you are a business owner work on improving acceptability, for there is nothing you can do about availability. Play with the market, not against it. If you are a decision maker, remember that with or without regulation the affordability of the industry will remain constrained. Might as well focus on upholding the minimum social and environmental needs of your society. Because there is no point in wrecking your country for the sake of nothing.
Or don’t. Its yours to lose.
&&&! Parts of this article are an abridged view into the author’s recent study about The Future of Oil, which was possible thanks to the European Centre for Energy and Resource Security (EUCERS) and the Konrad Adenauer Stiftung (KAS). Find the full study here.