Petroleum Economy

Petroleum is one of the most important aspects of the global economy. Trade in petroleum accounts for a major portion of international trade, and a fluctuation in oil prices can dramatically affect economies throughout the world.

A member of the fossil fuel family, petroleum is superior to coal and natural gas. Given the same volume as coal or natural gas, it packs more energy than either of them. A single barrel of crude oil—a mixture of hydrocarbons in the form of greenish or dark brown liquid—contains more energy than a houseful of natural gas. And, being liquid, oil is easy to transport.

Archaeological excavations in Iraq and Iran indicate that petroleum in the form of bitumen was used for building roads and coating walls and hulls of ships. In modern times, it replaced whale oil as an illuminating fuel. Commercial drilling of oil with a cable rig started near Baku, Azerbaijan, in 1846. The first oil well in North America was drilled in Canada in 1858 followed by one in Titusville, Pennsylvania, a year later. Overall production remained small. By the end of the century, the worldwide demand for oil was only 500,000 barrels per day. The introduction of the gasoline-powered car in 1905 in America provided an important incentive to develop the oil industry.

After World War II, the exploration, extraction, transportation, refining, and selling of oil products became the leading global activity in the goods production sector of the economy. Western petroleum companies, often called Big Oil, often appeared on lists of the top 20 global corporations by annual revenue or market value. When trade on oil futures was introduced at the New York Mercantile Exchange in 1983, its closing price appeared daily in the media alongside the price of gold, a benchmark of long standing. The quarterly decisions of Organization of Petroleum Exporting Countries (OPEC) on output and pricing are awaited eagerly by governments and financial markets worldwide.

The cost of production of oil varies widely. When, after a geological survey, an oil field is discovered on land or seabed and a hole is drilled, oil rises to the surface automatically as a result of internal pressure. Over time, as the size of the [Page 1315]underground reserve shrinks and, with it, the internal pressure, drillers inject water or natural gas into the reserve to lift the oil. This adds to the cost. Thus, extracting oil from aging wells is far more expensive than from fresh wells. The average cost of lifting a barrel of petroleum in the United States, where the petroleum industry has been in existence for more than 150 years, is now more than US$20. The corresponding figure for the oil-rich Saudi Arabia and Kuwait—where oil was struck in the 1930s—varies between US$1 and US$2.

Today oil is the source of many products in daily use, including aspirin, benzene, diesel, fertilizer, gasoline, heating oil, lubricants, man-made yarn, nylon, plastics, and wax. The chemical composition of oil and its products explains their pervasive presence in our daily life. They are compounds of hydrogen and carbon, the essential elements of living organisms. The ultimate source of carbon and hydrogen lies in the materials that formed the primordial Earth.

...