Energy Econ: Midterm 2

Who were the "Seven Sisters"? What eighth large integrated oil company should probably have been included within the designation of this group?

"Seven Sisters": · Anglo-Persian (British Petroleum) · Royal Dutch/Shell (Shell) · Standard Oil of New Jersey (Exxon) · Socony-Vacuum (Mobil) · Standard Oil of California (Chevron) · Texaco · Gulf

Proven reserves of natural gas in the U.S. have recently been substantially revised upward due to advances in the recovery of what geologic source of natural gas? What two complementary drilling and down-hole development techniques have enabled this marked increase in gas recoverability and substantial increase in estimated available gas reserves?

Hydraulic fracturing has enabled us the access these resources

What broad critiques were offered in class regarding the underlying premises of U.S. energy policies in the 1970s? What specific three perverse results were caused by the unfortunate policy of regulating oil prices in the U.S.? What was the origin of this policy of oil price regulation? Was it originally adopted as an explicit energy policy?

Many, if not most, of the policies of the 1970s were based on one or more major false premises: Conventional fossil fuels were facing imminent exhaustion. World oil markets could not be counted on to intelligently and efficiently allocate oil resources. Achieving "energy autarchy" through home-grown energy is desirable. By contrast, the reality was that: The world was not imminently running out of oil. Markets responded with energy demand conservation and new oil development of various sources of non-OPEC oil supplies (Alaska, North Sea, Mexico, Russia, etc.) Energy autarchy is expensive, unnecessary for security, and, therefore, undesirable. Some policies were very constructive (SPR), some policies were mildly beneficial (some extra-market encouragement of energy efficiency such as CAFE and building retrofits), and some policies were real "stinkers" (oil and gas price regulation). The continued regulation of oil prices was especially perverse and worked at cross-purposes with most other policies. By keeping the domestic price of oil products low by controlling the price of domestically produced oil (since we had no control over the world price of oil) price regulation: encouraged domestic demand, discourage domestic production, and encouraged greater imports. The administrative costs of energy regulation was far from trivial Frank Tugwell estimated these costs as exceeding $1 billion per year between 1974 and 1980. Likewise, the deadweight economic losses from resource misallocation were substantial Economist Joseph Kalt estimated these at $1-6 billion between 1975 and 1979

What has been the main cause of the recent dramatic increase in U.S. domestic petroleum production?

Finding natural gas as a valuable product Light crude -Congress just passed a bill to allow the US to export crude oil, there used to be a ban that prohibited the export of crude oil because we didn't want to lose our own supply -We think that the reason why we have so much crude now is due to fracking -Light oil -You don't have to do as much to get high value products out of it

What three countries in the world have by far the largest proven natural gas reserves—more than half of the total world reserves?

Russia, Iran, Qatar

What country currently supplies the U.S. with most of its imports by a rather wide margin? What continent do most of the U.S.'s oil imports come from?

US 38.8% Latin America 19.6% Canada 15.1% Persian Gulf 12.9% Africa 10.3% Top countries: - Canada - Saudi Arabia - Mexico - Venezula

Why were the supplies of so-called "old gas" thought to be price-inelastic? Why was this belief fundamentally mistaken? Specifically, what did this viewpoint misunderstand or simply ignore?

economists appeared to believe that the supply curve of old gas was almost perfectly inelastic because the old gas had already been sunk. therefore, economic regulation could be used to re-distibute the rents with very little supply consequence (WRONG) they were mistaken because supplies from "old gas" fields could be increased through further effort rand investment (deeper drilling, horizontal drilling, fracturing...)

What security policy statement adopted in 1980 is known "The Carter Doctrine" ?

"The Carter Doctrine" (1980) "Any attempt by an outside force to gain control of the Persian Gulf region will be regarded as an assault on the vital interests of the United States, and such an assault will be repelled by any means necessary, including military force." Created a Rapid Deployment Force stationed in the U.S. that could be quickly deployed to the Middle East Initiated the acquisition of new U.S. military bases in the region and an expanded naval presence in Middle Eastern waters. Authorized the deployment of a permanent U.S. naval force in the Persian Gulf, headquartered in Bahrain

What fundamental shifts in the structure and commerce in the world oil markets took place largely as a result of the nationalization/participation agreements reached in the Middle East during the 1970s? What was the nature of the new relationship between the host countries and the international oil companies still operating within their countries? What fundamental shift took place in the length of the contracts transacting in the world crude oil markets after the mid-1970s?

"The Old Order": The international majors had been fully vertically integrated. They did not compete much with one another to acquire oil. They competed downstream, primarily at retail. To the extent that crude was traded, it was traded almost entirely under longer-term multi-year contracts. The spot market in crude oil was relatively illiquid. "The New Order": The international majors had to acquire a sizeable portion of their crude oil stocks from the new national oil companies. They competed heavily against one another and would switch suppliers for small differences in prices. The market shifted markedly and quickly to much larger volumes transacting in spot markets.

What is meant by "associated" gas and "non-associated" gas? What is meant by "sweet" and "sour" natural gas? What meant by "wet" and "dry" natural gas?

- "Associated Gas" vs. "Non-Associated Gas" -- Gas found in conjunction with oil is called "associated gas" -- Gas found by itself is "non-associated gas" Note: When oil is found, it almost always contains some gas. However, gas can, and frequently is, found by itself. - "Dry" vs. "Wet" -- A gas resource which contains few NGLs (Natural Gas Liquids) is called "Dry" -- When a gas resource contains a relatively high amount of NGLs, it is called "Wet" - Sweet" vs. "Sour" --A gas resource that contains very little hydrogen sulfide gas (H2S) is called "Sweet"; otherwise, it is "Sour"

In what decade of the twentieth century did long-distance interstate natural gas pipelines finally really begin to be developed to a commercially significant degree and displace a majority of local manufactured gas ("town gas") operations in major U.S. cities?

- 1910-1920: Major advances in pipe rolling, metallurgy, and welding enabled the initial development of long-distance gas pipelines - Between 1927 and 1931, about a dozen major pipelines were developed with diameters of about 20 inches and distances exceeding 200 miles each

In general, what types of provisions were typical features in the international oil concessions signed before WWII?

- An exclusive right to a defined area for a specified period. - Temporary acquisition of mineral title. - Company bears all the commercial development risks. - Company payments to the host government, typically consisting of most or all of the following: - Upfront payment - Annual lease payments (likely per square mile) - "Royalties" per unit (e.g., barrel, ton) of crude oil sold - Share of the net revenues (profit sharing)

early 1900s, Eastern Hemisphere, what diverse national oil interests combined to form the main collusive entity controlling the Eastern market, and what was the name of the joint-venture market-sharing company that they formed? Roughly how long did it last as an effective organization? What forces eventually led to the erosion of this Eastern Hemisphere oil duopoly in the second half of the second decade of the 1900s? What large contemporary oil company traces its origin to the merger of two of the key companies involved in this joint venture market-sharing agreement in the Eastern market?

- Asiatic Petroleum Company (1902-1914), had monopolistic power in the Eastern market. formed from a market sharing agreement between Royal Dutch, Shell, and Bnito (each with ⅓ share) - Rothschild worked out an agreement among three of the largest producers in Baku to consign their oil for marketing in the Eastern market to Bnito. These Russian "independents" agreed not to sell in competition with Asiatic Petroleum in the Eastern market. Bnito had to "police" the Russian independents; if they sold in the eastern market, Bnito's share was reduced equally. forces that lead to the erosion of the Eastern hemisphere oil duopoly include: Completion of the Panama Canal in 1914 (ability for oil to get to Eastern markets, more american competition) The turmoil of World War I and its aftermath (russian revolution decreased amount of oil coming from that area) Major expansion of U.S. oil exports with the development of the oil fields in Oklahoma and Texas The most enduring result of the Asiatic Petroleum Company was the merger of Royal Dutch and Shell in 1911 (To preserve the national identity of both countries, the company merged in a holding company structure, with Royal Dutch taking 60% of the equity and earnings, and Shell taking 40%)

What major worldwide factors and trends drove the tremendous increase in world oil consumption between 1945 and 1970? Name as many as you can.

- Between 1949 and 1972, the world's energy consumption more than triples, oil consumption increased by a factor of 5 - US automobile and suburbanization continued shift worldwide from coal to petroleum - post-war reconstruction of Europe and Japan (under the Marshall Plan) - US had to get oil into Europe to secure Allies - spectacular emergence and growth of the new petrochemicals industries (plastic)

Although the Natural Gas Act of 1938 did not clearly direct the FPC to regulate the "wellhead" prices charged by producers of natural gas, in the early 1940s the FPC chose to do so in certain specific situations. The Supreme Court later upheld the FPC's initiative to regulate wellhead prices under these specific circumstances. What were the special circumstances under which the FPC decided on its own to regulate specific wellhead prices during the early 1940s? What gas industry structural changes resulted as companies sought to avoid this limited scope of wellhead price regulation?

- Consumer states wanted protection from perceived interstate pipeline abuses - Producer states hoped that federal regulations of pipelines would reduce pipeline investment risks and help gas producers reach LDC markets - Interstate pipelines reluctantly supported federal regulation (happen with or without them, escape a "common carriage" mandate, escape federal regulation of the retail prices, pipeline certification assists them in financing new pipelines) strucutral changes included applying a classic utility cost-of-service model, the FPC can order pipelines to serve new customers and the pipelines cannot cease serving customers, a Certificate of Public Convenience and Necessity was required before building a new pipeline and existing pipelines were allowed to expand their facilities without additional CPCN's

What in general was President Eisenhower's view of limiting oil imports by either a tariff or quota on imported oil in order to promote national energy security? What alternative policy did Eisenhower favor in order to promote national energy security?

- The U.S. Congress was inclined toward protectionist import policies based on the influence of influential Senators from the oil and coal-producing states (e.g., Lyndon Johnson, Sam Rayburn, Robert Kerr, Robert Byrd, etc.) - Several proposals for protectionist import tariffs or quotas were "dressed up" as national security policies. - Eisenhower understood the game and saw protectionist tariffs and quotas as really "anti-security" policies—i.e., "drain America first". - Eisenhower preferred free trade and building a strategic petroleum reserve. - Eisenhower tried to placate the protectionists through a "voluntary" import limitation program. This policy, of course, failed.

What, in general, were the nature of the "off-take agreements" and "special supply arrangement" among the large international oil companies engaged in the various joint ventures in the Middle East? What broad role did these arrangements play in aligning the interests of the joint-venture oil companies? Explain how they tended to better align the mutual interests of the companies?

- The oil companies exercised some loose "organization" through their system of "off-take agreements" and "special supply agreements'. - "Off-Take Agreements": Generally gave each partner in a joint venture a share of the oil equal to its equity share in the joint venture. - "Special Supply Arrangements": Because the partners were not equally capable of disposing of their equity-shares of the oil, these arrangements would provide for "crude-long" companies to sell to "crude-short" companies. - The special supply arrangements essentially helped the companies stay on the same page regarding the pros and cons of total production. - The crude-short companies could get their oil from the crude-long companies without lobbying for increased total production from the joint ventures. - Agreements among the oil companies as to what every oil company is going to get for every share of oil, and how they will share it with each other to maximize each company's advantages/capabilities - Without the special supply arrangements, the vertical integration of specific companies would encourage them produce more or less than their given share - You could either dispose of oil through your own single company, where there is complete vertical integration, or through long-term contracts between companies

How would you broadly characterize the difference between the size distribution of oil producing countries in the world today compared to the size distribution of reserve ownership by countries in the world today. Geographically, where do most of the world's reserves currently lie?

- The size of reserves diversity is much greater than the size of distribution currently - Geographically, most of the world's reserves are in Venezuela, Canada, Iran, Iraq, etc.

How would you broadly characterize the difference between the number of oil producing countries in the world and the number of net oil exporting countries in the world? What countries are the major net oil exporters?

- There are far more net importers of oil than net exporters - In the case that there is a shortage of supply, there would be few suppliers

The regulation of various natural gas prices has been a focus of regulatory policy throughout the history of the industry. Exactly what specific types of transactions do the following terms refer to: "wellhead price", "city gate price", and "burnertip price"? For most of the history of the natural gas industry (until fairly recently), who was the typical buyer and who was the typical seller of gas in each of these types of transactions?

- Wellhead price: Refers to the actual molecules of gas coming from the production of natural gas, the price charged to interstate pipelines by producers - City gate price: The price charged to local gas distribution centers from interstate pipelines - Burnertip price: The price charged to end-use-consumers by local gas distribution centers

Once one goes beyond conventional associated and non-associated gas, what are the other nonconventional sources of geologic natural gas?

- offshore gas (which many analysts would classify was "conventional") - coal bed methane (gas extracted from seams of coal by drilling) - shale gas (shale has low permeability, but there are environmental concerns mainly around contamination of water) - tight gas - gas hydrates (large amounts of methane trapped within a crystal structure of water, forming an ice-like solid)

Why are the "independent" regulatory commissions (such as most state public utility commissions, the Federal Energy Regulatory Commission, the Federal Trade Commission, the Nuclear Regulatory Commission, etc.) said to be politically "independent"? Are they completely independent of politics? Are they very likely more independent than other regulatory agencies such as the EPA or the Department of the Interior? If so, what are the bases of this greater independence?

- the "independent" regulatory commissions are provided some protection from immediate and arbitrary political control--- - the commissioners are appointed by the president or governor for fixed terms of office - the state or federal senate confirms commissioner appointments following confirmation hearings - some commissions have an explicit requirement for bipartisan membership -president or governor can remove only for "cause": incapacity, neglect of duties, malfeasance Some federal examples: - federal energy regulatory commission - nuclear regulatory commission -

What basic new policy did OPEC initiate within its ranks in 1982 in order to try to maintain "pricing unity" and a high world price of oil? Was this mechanism successful? What special role was played by Saudi Arabia within this OPEC scheme in the early 1980s? What action did Saudi Arabia eventually take in late 1985 and early 1986 and why? What effect did this Saudi action have on world oil prices?

-In 1982 OPEC initiated 'official quotas", which was the first official individual member quotas, with all countries receiving quotas except Saudi Arabia, with the Saudi's acting as a "swing producer" to support the world price. - For a couple of years, the Saudi's were willing and able to support prices and quotas of $29 in conjunction with a slightly reduced total OPEC quota (HOWEVER, other countries regularly exceeded their quotas and put pressure on the Saudi's swing production) - By 1985, the Saudis were producing about half of what could be imputed to be their quota and were having to draw down about 1.5 - 2 billion monthly In order to solve this problem, the King Fahd of Saudi Arabia invited OPEC to meet near Mecca, where he announced that " Every OPEC member should be free to act to protect itself if quotas continued to be violated - saying that if the other members did not cooperate, the Saudi's would begin producing their initial quota which was almost double their current quota - In Dec. of 1985, after an OPEC meeting in Vienna fell into dissension, the Saudi's began producing at their old quota This lead to the world price declining, however, the OPEC countries increased their production to maintain income

Why does it seem that the home governments of the integrated oil companies (Britain, France and the U.S.) did not intervene with some diplomatic muscle and/or "sabre rattling" on behalf of their home oil companies when it came to the issue of "fair compensation"?

1. Legal ambiguities and uncertainties: Formal legal action would have taken a long time to resolve and it would not necessarily have gone in the companies' favor. The host countries had the legal right to nationalize a company as long as "just compensation" was paid. 2. The illusion of company control was an anachronistic illusion. There was no actual reality to be rescued. 3. The companies' home governments wanted physical access to oil. Greater confrontation might have jeopardized physical access. 4. U.S. domestic politics would not have supported "gunboat diplomacy". The U.S. was in the midst of the Vietnam War. Another war—and a war "over oil"—was unthinkable. 5. The Middle East was too important a source of oil in the long run to risk alienating and agitating the host countries. 6. The U.S. government was beginning more and more to see low oil prices as a problem. Meaningful consumer conservation required higher prices. 7. The West needed strong allied governments in the Middle East to counteract Soviet influence in the area. Higher oil prices were essentially foreign aid, and most of this bill would be paid by the other western countries—not especially by the U.S. 8. Domestic politics severely constrained the more moderate Middle East countries from acting "more reasonably".

In what key ways has the structure of the international oil industry been transformed during the past four decades, especially following the participation/nationalization initiatives in the mid-1970s, the collapse of the Soviet Union, and the liberalization of the Chinese economy? What three major categories of international oil companies have emerged in these past four decades? What are the key differences among these three categories of oil companies?

1970 - - western oil almost dominated by International Oil Companies: :"seven sisters" + total and communist bloc is essentially 'self- contained' and 'self-sufficient' -----> shifted to -----> 2007, IOC's, NOC's (government owned national oil companies), GSE's (government sponsored enterprises) Company objectives: IOCs presumably maximize shareholder value; NOCs pursue national objectives; GSEs likely compromise between the two, at least a bit. Financial Transparency: IOCs and GSEs are governed by strict financial reporting standards (SEC's); NOCs are not at all transparent. Scope of operations: IOCs operate more "downstream" than "upstream", primarily in oil-importing countries where they manage large refinery and distribution facilities; NOCs stay close to home, developing local resources with the assistance of international oil service companies. GSEs often venture out with nationalistic objectives (e.g., China GSEs in Africa) International finance: IOCs and GSEs have sufficient financial transparency to access international capital markets; NOCs are opaque and tend to be internally financed.

From 1970 to 2007, there was a major shift between IOCs and the NOCs in the ownership of international in-the-ground oil reserves. Approximately what percentage of international reserves was owned by each in 1970, and approximately what percentage was owned by each in 2007.

1970: 85% IOC"s, 14% Russian Companies 2007: 78% exclusive NOC, 6% Investor Owned Companies (IOC's), 6% Russian Companies

Even though the FPC did not want to regulate wellhead prices of natural gas, what key event in the early 1950s forced it to begin regulating all wholesale wellhead prices charged for natural gas in interstate commerce? What were the main practical challenges faced by the FPC in carrying out this new regulatory mandate? How, in broad terms, did the FPC initially and subsequently proceed with its task of regulating all wellhead gas prices? What three major methodological approaches did the FPC/FERC sequentially go through in attempting to regulate the wellhead prices of gas between 1954 and 1978?

After WW2, the wellhead price of gas rose markedly and there was an extreme imbalance between producer and consumer states The practical challenges were the vagueness of the Natural Gas Law The three major methodological approached were: 1955 - 1960: Producer-by-Producer rates 1960 - 1973: "area rates" - call together producer in a state and have a big proceeding with multiple parties to figure out wellhead price for individual areas 1974 - 1978: "National Rate"

What new players tended to erode the economic power of the "Seven Sister" oil companies in the Middle East during this period (1945-1970)? Who specifically were some of these players?

American independents began to erode the seven sisters in the middle east: 1947 Ashland, Sinclair and Phillips formed the American Independent Oil Company and won a Kuwait concession 1948, Getty won a Saudi concession (these two eventually teamed up) the Middle east was also becoming more developed - Foreign independents also entered into the offshore Persian Gulf: - Japan Petroleum Trading Company - Enrico Mattei of ENI entered into a partnership with the National Iranian Oil Company that shocked the oil industry. -Mattei offered Iran 50% of gross profits plus 50% of net profits—essentially a 75-25 profit sharing arrangement in favor of Iran. Between 1948 and 1973, Russian production moved east to the Volga-Urals fields and Russia became a net exporter of oil. Even though the U.S. warned the Europeans against becoming too dependent on Russian oil, Italy, Germany, Austria, France, and Sweden all became major buyers of Russian oil.

During the 1920s, "holding companies" came to dominate the gas and electricity industries. Following its investigation of the holding companies, what criticisms of the holding companies did the Federal Trade Commission report back to Congress, thereby leading Congress to pass the Public Utility Holding Company Act (PUHCA) of 1935? What three policies did the FTC recommend that Congress adopt relative to holding companies that held gas pipelines? Did Congress adopt all three FTC-recommended policies?

FTC reprot: - monopsonistic power in gas production areas - discrimination against independent gas producers - monopolistic "city gate" prices - vertical foreclosure of independent pipeline access to HC-controlled LDC's - extensive financial abuses: financial misrepresentation, dilution of stockholder equity, inflation of state asset values, excessive financial leveraging - inability of states and localities to effectively regulate the industry, including even LDC prices charge to consumers (excessive transfer prices, inability of states to regular "city gate" prices) FTC's recommendations: 1. Break up the holding companies 2. impose federal regulation on interstate gas pipelines and services 3. impose common carriage requirements for interstate gas pipelines the PUHCA of 1935 ordered all holding companies to divest themselves of utility operating properties that are not interconnected

Under nationalization and participation, what financial/accounting valuation "theory/method " was initially suggested by the host countries for calculating the compensation payments owed to the integrated oil companies for their ownership interests in their Middle East oil concessions? From an economic theory perspective, in what way was this initial financial/accounting basis for paying compensation woefully paltry? What economic indicators/comparisons clearly illustrate how paltry it was? On what basis would conventional economic/financial theory seem to suggest they should have been compensated for the takeover of their businesses? In general, how far apart from one another would these two wildly different valuation methods have been? As negotiations finally turned out, approximately how much more liberal were the participation payments made by the host countries compared to the countries' initial "going-in" negotiating positions.

At its 24th Conference in 1971, OPEC laid out its Recommendations for Participation: Level of Participation: at least 51% Compensation: net book value Company commitment to buyback crude: for an interim transitional period The buyback crude basically just says that the oil companies need to play a role in running the downstream operations Nationalization vs. participation became a distinction without a difference. If the oil companies could be obligated to purchase the country's equity oil share, the country no longer had to worry about disposing of the oil downstream. The starting points for negotiations on valuation were the following: Host countries: "net book value" = original investments costs minus accumulated depreciation Oil companies: discounted present value of all future net cash flows For the six largest producing countries (Abu Dhabi, Iran, Iraq, Qatar, Kuwait, and Saudi Arabia), net book value would have been about $1.3 billion for 100% participation. This paltry amount of payments would have been equal to just: 23 cents per barrel of a single year's production ! One year's worth of oil company profits ! ½ cent per barrel of proven reserves !!! In the final outcome of the initial negotiations, an "updated net book value" was derived by adjusting net book value by several "fudge factors" resulting in a multiplier of about 3. Saudi Arabia $ 500 million Kuwait $ 150 million Iraq $ 68 million Qatar $ 71 million Abu Dhabi $ 162 million Total $ 951 million for 25% participation (equivalent to paying $3.8 billion for 100%) And Libya, Algeria and Iraq got away with paying something closer to book value.

Where in Russia were tremendous amounts of oil first found and remains a key oil-producing region today (although no longer part of Russia or the Soviet Union)? What two famous European families were heavily involved in the early development of Russian oil in this area prior to WWI? What special innovations and investments did each undertake that helped unlock Russian oil from this relatively land-locked region?

Baku, Russia (today known as Azerbaijian). Found because of its surface oil shows. Initially the Russian oil industry was a state-run monopoly and technologically stagnant. In 1870 became privatized and quickly blossomed. The two famous European families that were heavily involved in the early developments of oil in this area: - the Nobel brothers in the 1870's who found a better way to make kerosene(which made it so Rockefeller couldn't compete), created the first well-to-refinery pipeline in Baku and the first cistern ship(oil tanker) in the world that transported oil and refined products up into Russia towards St. Petersburg - The Rothschild Banking family by forming the Caspian and Black sea Petroleum Company(Bnito). They also built a railway connecting Baku and Batlim. Also built a refinery in Fiume which allowed to Russia to break from its landlocked status and ship oil worldwide.

Why did America become rapidly refocused on the issue of energy security—especially oil security—in the years following WWII? What fundamental geographic shift was taking place in world oil supplies? In approximately what year did the U.S. cross the line and become a net importer of petroleum and petroleum products? Did the U.S. shift to becoming a net exporter because U.S. production declined? Roughly when did U.S. oil production actually peak?

Because between 1950 and 1973, there was a shift in world oil supplies to the Persian gulf states, and the production was extremely cheap production was also increasing in the US, but in 1948 the US became a net importer of oil indefinitely, however, the US remained a top producer for a while During the second world war, between 1942 and 1945, the US supplied about 85% of all oil consumed by the Allied nations and their militaries, by the end of the war, the US became concerned about long-term oil security Under Roosevelt, Harold Ickes proclaimed "We are running out of oil, if theres a WOrld War 3, it would have to be fought with someones else's petroleum..."

In what ways did WWI demonstrate the strategic importance of petroleum? Allies main source of petroleum during WWI? What hostile German activity in the Atlantic Ocean involving this petroleum dimension of the war contributed more than anything to eventually drawing the U.S. into WWI late in the war?

British-German national rivalry raises British concerns about the future supremacy of the British Navy. Winston Churchill becomes a strong advocate for military preparedness. The British government decides to contribute financial assistance directly to the struggling Anglo-Persian Oil Company in exchange for taking a controlling interest of the company and a long-term contract to supply oil to the British Navy at favorable prices. WWI establishes the strategic importance of oil (and the internal combustion engine). 80% of the oil used by the Allies was supplied from U.S. continental oil production. During the course of WWI, Anglo-Persian becomes a vertically integrated international oil company.

Why, when faced with the prospect of fabulous success in Bahrain and Saudi Arabia, did Chevron choose to share its new venture with a partner? What partner did it choose and why?

Chevron was concentrated upstream in oil production (into finding oil and brining it up)—not downstream in oil refining and marketing. It was having a hard time disposing of even the small amount of oil it had found in Bahrain. Texaco was a Texas-based oil company faced with the opposite problem: it was concentrated in the downstream and needed crude oil. In 1936, Texaco dropped out of the TPC and Chevron and Texaco pooled their assets "East of the Suez" and pursue a 50-50 joint venture for producing and marketing the Bahrain and Saudi oil. This joint venture was named the California Arabian Standard Oil Company. In 1944, it was renamed the Arabian American Oil Company (Aramco)

What was the basic structure of the Crude Oil Windfall Profits Tax? Describe generally how this legislation sought to deregulate U.S. domestic retail oil prices while also taking away at least some of the "windfall profits" that would otherwise have accrued to the oil industry if simple and sudden price deregulation had been adopted instead.

Designate a reference price which is just a little bit above the regulated price Sold my oil at 15$ which gave me a windfall exposure of 2.55$, and you have to pay a tax on the windfall profits Over time, the tax is phased out by the phasing out of what you define as a windfall Consumer states see that there are going to be windfall profits and see regulation as bringing lower prices

What two broad formats for dispute resolution were generally contained in international oil concession contracts and why?

Either the commercial laws of the host country (if developed), or a "choice-of-law clause"(can designated the law of a third country that will government the interpretation of the contract) or an "arbitration clause"

What role did the Texas Railroad Commission (and other state regulators implementing demand-prorationing) allegedly play in supporting world oil prices during the immediate post-WWII period? What oil market developments caused the ability and motivation of the TRC (and other states' prorationers) to support world oil prices to gradually erode in the decade following WWII? What is the most striking evidence of the inability of state demand-prorationing to support the world oil price in a manner consistent with the interests of the U.S. domestic oil companies? What broad categories of U.S. oil companies were hurt, and which were helped, by the continuing attempts to support the world price of oil by demand-prorationing U.S. domestic production?

From 1948 onward, U.S. net imports continued to steadily rise. By 1954 to 1957, net imports rose from 15% to 19% of domestic production. Domestic oil prices were "soft" in the U.S. during the 1950s causing unrest among domestic independents. In 1949 and 1950, there were various proposals for import tariffs, but these all failed. The "majors" tried to keep peace in the industry by voluntarily restraining their imports in 1953 and 1954. However, the relative power of the "majors" was declining as American independents flocked overseas to develop additional oil resources. In 1956, the the American oil industry invested more overseas than in the U.S. State petroleum regulators throttled way back on Market Demand Factor "allowables" (MDFs) during the 1950s: Texas 76 → 33 Oklahoma 30 → 23% Louisiana 90 → 33% New Mexico 74 → 49%

What economic factors led to the adoption of the Mandatory Oil Import Program by the U.S.? How did the failure of state demand-prorationing to support the interests of domestic oil producers lead to the Mandatory Oil Import Program (MOIP)? Approximately when was it adopted, approximately how large was the quota? How was the MOIP implemented and what were its basic economic effects? (Be sure to mention: its effects on world oil prices, domestic oil prices, domestic constituencies benefitted and lost from the program and why, describe the exact nature of any deadweight loss effects, etc.)

From the early 1950s to the late 1960s, there was a large amount of "excess" capacity in the Middle East that was not producing at full production. Driving down oil price. - The American MOIP, although supporting the domestic price of oil, placed additional downward pressure on the world price of oil. The wellhead price of oil gradually declined from 1950 to 1970 -In 1955, Congress had passed legislation authorizing the President to intervene to limit imports by Presidential Proclamation if they posed a threat to national security. -Faced with mounting tensions in the domestic oil industry aggravated by the 1958 recession, Eisenhower imposed the Mandatory Oil Import Program in March 1959. -The quota was initially set at 9% but then increased to 12.2% in 1962. The MOIP stayed in place until it was rescinded by Nixon in 1973. -Without this program, imports would have been as high as 20% -Under the MOIP, quota "tickets" (essentially, "permission slips" to import oil) were issued and allocated for free to all refineries on a "grandfathered" basis—i.e., in approximate proportion to their recent actual imports. -Economic punch line: The MOIP supported domestic producers by driving a wedge between the world price of oil and the domestic price of oil.

Briefly describe the broad mutual obligations undertaken by the members of the International Energy Agency pursuant to the International Energy Program agreed to internationally in 1974. What very important physical oil security measure did the U.S. undertake and construct as a result fulfilling its obligations under the IEP?

IEP participants agree to 3 basic mutual obligations: Maintain "emergency reserves" sufficient to sustain domestic consumption for 60 days in the form of (1) oil stockpiles, (2) ready fuel-switching capabilities, and (3) shut-in quick oil production capability. Implement demand restraint: In the event of a declared emergency, each country must immediately implement pre-specified measures to reduce oil demand by 7%. Share Oil in the event of a declared emergency in accordance with pre-specified formula. The U.S. has had three different types of strategic oil reserves: Naval Petroleum and Oil Shale Reserves In 1910, 1916, and 1923, oil fields were set aside and shut-in for potential emergency access by the military in the event of war. In 1976, the function of providing emergency oil supplies was shifted to the Strategic Petroleum Reserve (SPR) and most of the older reserve locations were sold by the government. Strategic Petroleum Reserve (to be discussed in more detail next) Northeast Home Heating Oil Reserve Created by President Clinton in 2000 to be closer to and serve an emergency in the Northeast. Consists of 2 million barrels of heating oil located in New Haven, Providence, and New York Harbor. The Strategic Petroleum Reserve Physical Description: The SPR is located in human-made salt caverns in four locations in Texas and Louisiana (one more in Richton, Miss. is planned). A typical cavern in cylindrically shaped with a diameter of 200 feet and a height of 2000 feet and holds 10 million barrels of oil. (The Sears Tower would fit inside with room to spare.) Drawdown Capability Rate: 4.4 mbd Terms of Releases: All released oil is sold on an open competitive basis—i.e., at prevailing market prices. History of drawdowns: 1990-91: Desert Storm, 21 million barrels 2005: Hurricane Katrina, 11 million barrels 2011: Libyan-related shortages in Europe, released 30 million barrels—matched by the sum of other IEA countries

When the Saudis eventually increased their participation in Aramco to 100%, did this mean that the international oil company partners in Aramco were simply summarily dismissed from any further association with the Aramco operations in Saudi Arabia? What was the nature of their continuing involvement with Aramco (at least for a time)?

If the oil companies could be obligated to purchase the country's equity oil share, the country no longer had to worry about disposing of the oil downstream??

In round terms, approximately what percentage of U.S. petroleum consumption is currently provided by net imports? At what level did this percentage dependence on net imports reach a peak and in what approximate year did it peak?

Imports peaked in 2005 at 60.03% 40% of US consumption is covered by net imports

Why was Gulf Oil forced to sell its Bahrain concession? Who was it sold to? Why was Gulf Oil not forced to dispose of its Kuwaiti concession as well for the same reason? Why did Gulf Oil agree to partner with Anglo-Persian and form the Kuwait Oil Company to develop its Kuwaiti concession? How did Gulf's partnership with Anglo-Persian in the Kuwaiti Oil Company bring it into indirect and loose cooperation with the other partners in the TPC and virtually into the Red Line Agreement.

In 1926, Holmes' oil company was so strapped for capital that it sought to sell itself to a larger oil company. Both Anglo-Persian and Standard Oil were skeptical of oil in Saudi Arabia or Bahrain and declined the overtures from Holmes. (This was before they signed the Red Line Agreement.) In 1927, Gulf agreed to assist Holmes by providing financing to develop the Bahrain concession. In 1928, after Gulf signed the Red Line Agreement, Gulf could not proceed with either Saudi Arabia or Bahrain except within the TPC. Gulf found an American buyer for its Bahrain concession, Standard Oil of California (SoCal, later called Chevron). In 1931, almost immediately after beginning to drill in Bahrain, Chevron struck oil. after Chevron discovered oil in Bahrain in 1932, Anglo-Persian (BP) suddenly became very interested in Kuwait. They pushed through British-American diplomatic channels to establish a joint venture with Gulf in Kuwait. This 50-50 joint venture in late 1933 became known as the Kuwait Oil Company. As part of their joint-venture agreement, Gulf and Anglo-Persian agreed not to injure the marketing position of one another "at any time or place".

Some skeptical observers believe that if "push ever comes to shove", the IEP will not actually be as effective as it seems to promise, and that it might not be any more effective than simply relying on the spot market to allocate the pain of a sudden reduction in total oil supplies. What is the nature and bases for their skepticism?

No doubt the IEP is a constructive program, and the IEA (with a broadened mandate) has done much to promote energy security, economic development, and environmental protection. Also, no doubt that it's existence will discourage attempts at selective embargos. However, there are two potential problems and reasons for some skepticism: the organization has complex governance rules that enable certain individual countries or groups of countries to veto emergency sharing. To make any difference in itself, the sharing must somehow redistribute oil differently than the spot-market would reallocate oil in the event of an emergency. To the extent that this difference is large, sharing will be costly and likely to be resisted. Thus, it is not clear that the sharing mechanism will be any more effective than the spot market in "sharing the pain" of a shortage.

How did Muammar Qaddafi of Libya tactically proceed in putting pressure on the oil companies in Libya? What did this have to do with Armand Hammer, the head of Occidental Petroleum? What did Armand Hammer ask the other American oil companies (and Exxon, in particular) to do in order to reduce pressure on Occidental? Did they comply with Hammer's request? Do you think this was a strategic mistake by the other oil companies? Briefly explain.

In 1940, libya demanded a 20% increase on the posted price of oil oil and was countered with a mer 4 cent Exxon and Occidental rebuttal Libya put pressure on Occidental by ordering them to reduce it crude production unless they met libya's demands ---> Occidental then pleaded with Exxon to supply them with the replacement crude in order to outlast Quaddafis demands Exxon refused to help, probably because they didnt think it would do any good in the long run SO, Hammer agreed to increase the posted price to 30 cents, and a profit sharing increase from 50% to 55%, shortly after, other "independents" in Libya agreed Eventually the majors ( Chevron, Texaco, Shell, BP) also agreed Throughout this episode, the U.S. State Department appeared to take the attitude that it had very little leverage it could exert over Libya and that higher oil prices would not be all that bad. If higher oil prices meant more revenues to the Middle Eastern countries, then perhaps this was a more politically acceptable substitute compared to officially increasing foreign aid directly.

What was the "As-Is Agreement" (or Achnacarry Agreement)? Who joined in this agreement and what, in broad terms, did they agree to? How successful was this agreement in achieving its objectives and why was its effectiveness so short-lived; what major disruptive event hit the world oil industry in the early 1930s?

In August 1928, Henri Deterding of Royal Dutch/Shell rented a hunting lodge by the name of Achnacarry Castle in the Scottish Highlands and invited high level executives from Standard Oil of New Jersey, Anglo-Persian, Gulf Oil, and Standard Oil of Indiana to join him for several weeks of hunting. The true agenda of this secret meeting was not hunting. Instead, it was to work out an agreement among the oil companies regarding how to "stabilize" the oil market in Europe and Asia. By 1928, even before the economic collapse of industrial production during the 1930s, there was a growing "surplus" of oil production. New oil supplies were surging out of the United States, Venezuela, Rumania, and the Soviet Union, flooding the markets, weakening prices, and threatening ruinous competition among the majors. Achnacarry eventually led to a 17-page document titled simply "Pool Association". It became better known as "the As-Is Agreement". The key provision of the As-Is Agreement was a provision that called for all the participants to hold fixed at their 1928 levels the relative shares of final petroleum products sold at retail in various geographic markets. Beyond this key market-sharing provision, the signatories also agreed to share facilities in order to avoid duplication and drive down costs, be cautious about undertaking investments in new refineries, and supply oil from the closest geographical source by swapping oil among themselves in order to minimize transportation costs. The agreement also provided for the creation of an "Association" consisting of one representative from each company to oversee and coordinate the conduct of company activities in accordance with the agreement. In order to avoid violating the American antitrust laws, the domestic U.S. market was explicitly excluded from the market-sharing agreement. (The American antitrust laws are generally written in such a manner as to protect American consumers, not to preclude American business activity that might adversely affect foreign consumers.) one gaping flaw: it did not include all the relevant suppliers. American "independent" oil companies supplied about one-third of the oil consumed outside the U.S. Given the aggregate size of the American independents, it was critical to the success of the As-Is Agreement that these companies also be somehow "organized" into the As-Is Agreement. Moreover, the 17 American companies only controlled about 45 percent of the American exports.

When the newly formed Anglo-Persian Oil Company was looking for a partner to contribute needed capital to quickly develop it's oil concession in Persia, why did the British government take an interest in assuring that a British national company would be its partner? What objective of pre-WWI British military strategy did the Anglo-Persian Oil Company become an essential part of? What unusual step did Winston Churchill spearhead to assure that the British government would control the development of oil in Persia/Iran?

In view of its growing rivalry with Germany in the early 1900s, the British government was keenly interested in converting the British Navy from coal to fuel oil and diesel fuel. D'Arcy quickly realized he needed more resources and sent out "feelers" to Rockefeller and the Rothschilds. The British government was interested in keeping D'Arcy's Persian concession entirely a British venture. In 1904, a small company called Burmah Oil had secured a tentative agreement to provide oil to the British Navy, but lacked enough oil resources. The British government recruited Burmah Oil to join with D'Arcy's venture. •The British government reached the momentous decision that the only way to preserve Anglo-Persian as a British enterprise was for the government itself to take a financial stake in the company. •Winston Churchill championed the cause, and succeeded in convincing Parliament to pass a bill investing 2.2 million British pounds in Anglo-Persian. -In return, the British government was given 51% controlling share of Anglo-Persian and a secret "sweetheart" 20-year contract to get fuel oil at below-market prices. -This partnership also gave the Royal Navy an important source of off-budget financing so that it did not have to seek its full budget from Parliament.

In what sense was the First Gulf War the first major multinational war waged almost entirely over issues related to the control of oil? Approximately what percentage of the world's oil reserves would have been controlled by Saddam Hussein had he proceed to invade not only Kuwait, but also Saudi Arabia and the UAE?

It started when Saddam accused the Kuwaitis of conspiring with the US to keep Iraq weak and stealing Iraq's war by horizontal drilling in the south Ramaila oil field Iraq had 10% of the world's oil and Kuwait had another 10%. The UAE were just one step from Saudi Arabia which has 30% of the world's oil ---- Saddam was threatening to take 50% of the world's oil The effect on the oil market was relatively mild and short-lived

What famous Russian leader was a labor organizer during the early days of social unrest in the Russian oil fields? What broad course was traveled by the Russian oil industry between 1900 and the eve of WWII? Why was the main Russian oil resource (as well as the oil resources in Romania) of such great strategic importance during WWII?

Joseph Stalin was a labor agitator in Batum and Baku around 1903 - 1907 Oil production in Baku was very dependent on the continued infusion of Western capital. The pre-WWI civil unrest in the Baku region frightened off foreign investment. 1902, production started to decline The Bolshevik revolutionists occupied Baku in 1918 and soon nationalized the oil companies. •In March 1921, Lenin issued his "New Economic Policy"(for general industry, not just oil) allowing limited capitalism and requesting the return of foreigners to restore oil production. A wide variety of Western companies re-entered the Russia oil market at this time. •After a few years, Lenin reneged on the deal and systematically revoked all foreigners' concessions. By 1930, most of the foreigners had been expelled. Russian oil in WW2: by mid-1930's, russian oil was revved and passing past peaks (supplied roughly 17% of Western Europeans oil) supplied oil to Hitler during WW2 under the Molotov-Ribbentrop Pact of 1939 1940, the British and French undertook an unsuccessful oil bombing campaign against the Baku oil fields called "operation pike" Hitler tried to take the Baku oil fields but was also unsuccessful

What obligations have the signatories to the International Energy Program Agreement undertaken as part of the Emergency Sharing System (ESS)?

Key provisions: -- emergency oil reserves (physical reserves, fuel-switchng measures, "surge" capacity) -- demand restraint ( in the event of a 7% interruption in world oil supplies, each county will invoke off-the-shelf demand restraints sufficient to reduce their own domestic demand by 7% --oil sharing (share oil with one another in accordance with a pre-established formula

In broad terms, what were the primary causes of the "Fourth International Oil Shock" that took place in the period roughly 2005-2008? When did this oil price shock peak, and at what approximate price per barrel? Within the following six months, how far down did it collapse?

Lack of spare production capacity Mainly due to middle east tensions Increase in demand from China and India Failing of the US dollar Decline in petroleum reserves Worries over peak oil Financial speculation Oil price peaked at $146 in June 2008, which was followed by crashing prices (back to $40 by the end of 2008) due to worldwide recession

When the oil companies came under increasing political pressure to increase their payments to the host country governments during the years 1969-1973, why didn't the companies resist more vigorously the strong-arm tactics of the host countries? Why did the home countries of oil companies not give them more support?

Legal ambiguities and uncertainties: formal legal action would have taken a long time to resolve and it would not have necessarily gone in the company's favor ( the host countries had the legal right to nationalize a company as long as "just compensation" was paid) The illusion of company control was an anachronistic illusion. There was no actual reality to be rescued The companies host governments wanted physical access to oil. Confrontation might have jeopardized physical access, they are only interested in natural security and physical oil. US domestic policy would not have supported "gunboat diplomacy" The middle east was too important a source of oil in the long run to risk alienating and agitating the host countries The US government was beginning to gradually see low oil prices as a problem. Meaningful consumer conservation required higher prices. The west needed strong allied governments in the middle east to counteract the Soviet influence in the region. Higher oil prices were essentially foreign aid, and most of this bill would be paid by the other western countries - esp. By the US Domestic politics severely constrained the more moderate middle east countries from acting "more reasonably"

What were the mutual interests and concerns of municipal governments and private gas distribution companies that gave rise to municipal "regulation" (frequently by contract) in the early days of gas industry development? What did each party need/want to get from the other party?

Local Distribution Companies (LDCs) wanted certain things from municipalities: Long-term streetlighting contracts to support capital investments Eminent domain to lay local pipelines under streets and properties Exclusive neighborhood franchises were helpful in achieving economies of scale and further reducing investment risks Municipalities wanted certain things from gas companies: Service to residents at reasonable prices Avoid duplication of subsurface local pipelines In many cases, municipal government themselves started their own municipal gas distribution operations Even today, about one-third of all LDCs are government-owned (they are usually very small) Regulation: In the second half of the 1800s, local municipalities began to issue exclusive gas franchises to companies for service in regional neighborhoods or all of their cities, requiring: Universal service on nondiscriminatory terms to all similarly situated residents Reasonable prices (usually contractually agreed to beforehand, and subject to periodic review and renewals) As gas companies expanded business across many municipalities, the companies sought the security of broader regional regulation by state regulatory bodies. Beginning in 1907, and very rapidly expanding to almost every state, state utility regulatory commissions were born. "public utility commissions", "public service commissions", "state railroad commissions", state commerce commissions"

Who were the major partners in the Turkish Petroleum Company immediately following WWI? What did these partners agree to in signing the "Self-Denying Clause", or so-called "Red Line Agreement", as part of their TPC partnership? How did the American oil companies manage to "shoot their way" into the TPC?

Major Players (American): Standard oil of New Jersey, Socony-Vacuum (mobil), Texaco, Gulf, Standard oil of Indiana, Atlantic and Sinclair(dropped out) -- 1928 only 5 were admitted •In restructuring the TPC in 1928, the new partners all agreed to "the Self-Denying Clause" (better known as "the Red-Line Agreement") in which they contractually committed that their companies would pursue oil development within the red-lined boundaries only through their participation in the Turkish Petroleum Company. •As a compromise to please the British, the American State Department agreed that the U.S. companies would not seek separate concessions but instead would be allowed to buy into the Turkish Petroleum Company. (momopsony power)

Why was the nationalization of the Anglo-Iranian Oil Company in 1951 a failure? How did the resolution of this crisis situation in 1953 fundamentally change the partnership and business structure of the oil concession arrangements in Iran after 1953? Thereafter, who actually owned the in situ oil reserves in the ground? What cautionary lessons would other host governments in the Middle East likely have learned from the Iranian nationalization experience in 1953?

Mossadegh affair of 1953 the forced nationalization was a big deal for the British, mainly because oil wealth was a considerable financial importance to the British treasury, as well as the access to physical access to oil -- lead the British to want to invade Iran, but the Americans convinced them not to do it in order to not give Russians an excuse to invade British launched an international boycott of Iranian oil, which plummeted from 240 million barrels in 1950 to 10 million in 1952 ( other arab oil producing nations quickly filled the void with their oil) Mossadegh could not back down and was corned by his political base and his own personal hatred for the British--- he went on to declare martial law this led to the British led Operation Ajax, which led the Iranian military to arrest the Shah (this incident tarnished the American credibility in the Middle East) •Although the Shah was re-instated to power, he was politically constrained from simply inviting the return of the hated British as the controlling interest in Anglo-Iranian. •The U.S. took the lead in putting together a new consortium of companies to operate the Iranian concessions. •The National Iranian Oil Company established by Mossadegh would own Iran's reserves (a major change from the past), but the actual operations would be conducted by Iranian Oil Participants Ltd. Under a 50-50 profit sharing arrangement under the following ownership: Exxon 8% BP 40% Mobil 8% Shell 14% Texaco 8% Total 6% Gulf 8% European 60% Chevron 8% U.S. 40%

Briefly explain what is meant by each of the following: • Natural Gas Liquids (NGLs) • Liquefied Petroleum Gas (LPG) • Gas-to-Liquids (GTLs) • Compressed Natural Gas (CNG) • Liquified Natural Gas (LNG)

NGL - natural gas liquid, relatively light hydrocarbon molecules generally found with NG(primarily ethane, propane, and butane) LPG - liquified petroleum gas, a mix of propane and butane that is liquid at room temperature GTL - gas-to-liquid, conversion of natural gas to various liquid fuels CNG - compressed natural gas, gas compressed up to 3600 psig and frequently used as vehicle fuel LNG - liquified natural gas, gas cooled to -256F for storage or transport

What is meant, in general, by "natural gas liquids" (NGLs)?

Natural gas is naturally occurring hydrocarbon gases Biogenic: Generated microbially from organic matter near the earth's surface (e.g., common "swamp gas") The largest gas field in the world, Urengoy in Siberia, is biogenic gas trapped below the permafrost. Thermogenic ("Geologic"): The gas typically associated with the "oil & gas industry" is thermogenic gas produced by thermal "cracking" of long-string hydrocarbon molecules deep within the earth's surface (to oilmen, it is "spoiled" oil)

What is the basic origin of geological natural gas? How is it related geologically to oil?

Natural gas is naturally occurring hydrocarbon gases Biogenic: Generated microbially from organic matter near the earth's surface (e.g., common "swamp gas") The largest gas field in the world, Urengoy in Siberia, is biogenic gas trapped below the permafrost. Thermogenic ("Geologic"): The gas typically associated with the "oil & gas industry" is thermogenic gas produced by thermal "cracking" of long-string hydrocarbon molecules deep within the earth's surface (to oilmen, it is "spoiled" oil)

To the extent that oil-related issues might have contributed some additional (but likely not determinative) motivation for the U.S. invasion of Iraq in March 2003, what might these motivations have been?

Oil prices began skyrocketing, mainly due to demand growth from emerging (competing with US) economies Return of "peak oil" prophets Never-ending troubles in the Middle East Neo-conservative War: Reduce long-term dependence on Saudi Oil: they are an insecure ally and Iraq has the second largest oil supply in the world Democratizing iraq would promote stability in the region (extremely ambitious)

Following the adoption of the Mandatory Oil Import Program (MOIP), did the TRC (and the other state demand-prorationers) largely lose its ability to support the world price? Briefly explain the basic economics of your response to this last question? When approximately was the MOIP terminated?

Over time, special provisions and exemptions proliferated and the MOIP became more and more complex to implement. By 1971, the world oil market was rapidly tightening and prices began rising toward U.S. domestic levels. The case for protecting domestic oil producers from cheaper oil imports was rapidly disappearing. Furthermore, excess domestic production capacity was disappearing threatening to increase domestic prices. Political pressure was increasing from oil-consuming states to allow more imports. In 1973, Nixon ended the MOIP.

When state regulatory commissions sought to effectively regulate the burnertip prices being charged by local gas distribution companies (LDCs) to retail gas customers within their states, why was it necessary for them to scrutinize the reasonableness of the upstream "transfer prices" being charged to the LDCs by their affiliated interstate pipelines and gas production affiliates? Why had this not been an issue when the LDCs were selling manufactured gas to consumers? When regulators attempted to scrutinize the reasonableness of these upstream "transfer prices", on what Constitutional grounds did the Supreme Court forbid them to undertake such regulatory scrutiny? (By "scrutiny" in this context, I mean evaluate the "reasonableness" of these upstream transfer prices and refuse to allow the LDCs to recover any payments made to upstream affiliates that exceeded "reasonable" levels.)

Pipeline companies who had affiliations with producers could work in cooperation to charge higher prices to LDCs. Pipelines could claim that the combination of wellhead costs + transportation costs led to higher prices for LDCs. Since LDCs face direct demand from consumers, they have to try to keep their prices low in order to compete Natural Gas Act The NGA gave the Federal Power Commission (FPC) the authority to regulate the interstate gas industry in three ways: "Sales for resale" (wholesale gas sales) in interstate commerce This potentially included both "wellhead" prices as well as "city gate" prices, but wellhead price regulation appeared to be specifically exempted. Prices charged for pipeline transportation services provided in interstate commerce Federal certification of interstate pipelines and other facilities used for sales and transportation in interstate commerce

As initially conceived and pursued, what was the major difference between "participation" and "nationalization"? Why did Sheikh Yamani of Saudi Arabia strongly favor participation over nationalization? What was he apparently most concerned about? What were the three major issues in the negotiation of participation agreements? In the end, why did there prove not to be much difference between participation and nationalization?

Political Spin: Nationalization has such negative connotations bordering on simple "theft". But what reasonable person could possibly object to host country "participation"? Nationalization would require each individual country to operate its oil company and dispose of its oil. They had very little experience in doing either. Moreover, nationalization would pit each country against the other in selling its oil. Nationalization also might frighten off foreign investment of all sorts. The host countries might succeed in capturing the asset, but then lose any existing market power the companies now had downstream in selling the oil. To the extent that oil companies had market power, they would simply exercise this market power downstream. In the end, the host countries could be worse off.

State and federal regulatory agencies are said to directly engage in both "quasi-legislative" and "quasi-judicial" activities. What does this mean basically?

Quasi-Legislative Proceedings: Rule makings - issuance of regulation of broad applicability Quasi-Judicial proceedings: adjudications - issuance of order focused on individual actors - permitting and approvals of specific projects - enforcement against violator of rules or statutes

To the extent that anything can be generalized about "what economists believe", what causes them to be more sanguine and dismissive about the national security and economic impacts of a complete interruption of oil from one the U.S.'s traditional oil suppliers (for instance on the order of 5% of U.S. consumption)? (What processes do economists believe would happen to ameliorate the results of such an event?)

Rather than promoting self-sufficiency, ie. only domestic production for domestic consumption, economists believe that a more sane strategy for energy security is diversification of energy sources (both the type of energy and the place we get it from) 1)There is one highly unified world oil market. 2) If it needs to, the U.S. can always bid oil away from other consumers. A very large amount of oil flows through the spot market. Oil deliveries are directed by market forces to the highest bidders. -Even long-term contracts have pricing terms linked to the spot market price. 3) The main economic damage done by short-run disruptions consists of temporary economic dislocations due to the price oil increases, and an international transfer of wealth to oil exporting countries. 4) The spot market naturally and automatically spreads the pain of a disruption and minimizes its overall economic impact.

What were the major economic and political effects of the 1973 Arab Oil Embargo? Did the "selective" aspect of the embargo succeed? Why or why not?

Shockingly large run-up in oil prices Oil prices shot from about $2.80 to $17.05 (a comparable percentage increase today would send prices to $500 per barrel) Relatively small reductions in overall oil supply Arab oil production fell by about 20% within months, but Iran filled a good portion of this deficit. Overall reductions were about 10% of total world oil exports but only about 5.5% of world oil consumption. Abject failure of the selective embargo (the oil will get rerouted and the oil will flow to the highest bidders) Oil is a fungible commodity and selective embargoes just don't work. Erosion of support for Israel In mid-November, the European Community passed a resolution supportive of the Arab position in the conflict. Japan did the same and was reclassified as "friendly". Resolve by developed oil consumer countries(OECD) to formulate a collective security response (large western oil countries) Formation of the International Energy Agency to counteract any future selective embargoes

Why did the collapse of Russian and Soviet Union oil production in the early 1990s (altogether a quick and rather sizable loss of about 5 mbbl/d) not have much of a discernible effect on world oil prices?

The collapse of USSR in 1991 caused the decline of oil production, but it was aready self-contained within the union so it didn't bleed into other nations.

To the extent that world oil prices suddenly spike upward in response to an interruption of a major portion of world oil supplies (e.g., in response to a blockage or slow-down in the Straits of Hormuz), the U.S. Congress will be under extreme political pressure to re-impose oil price regulation. To the extent that Congress does so, what three totally counterproductive effects can we expect this policy to have (just as it did in the 1970s)? What alternative policies might better address the domestic political concerns without having such large inefficiency impacts?

Straits of Hormuz: - 17 mbbl/d flow through the Straits the Straits of Hormuz (about 30% of all seaborne traded oil) - most (85%) shipments flow to Asia(India, Japan, Cina, S. Korea) - 21 miles acres (actual shipping lanes are about 5 miles wide) - Saude Arabia and UAE pipelines have about 4.3 mbbl/d capacity to bypass the Straits Potential policies: - strategic petroleum reserves (best thing we ever did) - diversification of energy supplies - joint energy security alliance with other consuming countries - alliances with key supplier countries - fostering spot markets and financial heading by the private sector

The contractual "business model" adopted after the 1970s for international oil companies operating in foreign countries was the "Production Sharing Agreement" (PSA). What are the basic elements of a PSA contract?

The "Production Sharing Agreement": A foreign company is invited into a country to engage in exploration and production (E&P) activities. The host country retains full ownership of the underground in situ oil and gas reserves. The company assumes all investment risks. If the company successfully finds oil, they generally receive the full economic benefits of the oil until they recover their past and ongoing E&P costs. This oil is frequently called "cost oil". All revenues in excess of what is needed to recover past and current ongoing costs is shared between the company and the country—usually about 80% to the host government and 20% to the oil company. In the beginning, there were concessions during which the oil companies owned the oil in the ground The company is being brought in to do business, but under very strict terms set by the host country They keep all the proceeds until they have fully recovered all the input costs/investment costs When you find more oil, we will get 80% of the net proceeds, you get 20% This is the current risk/reward structure

Why is the security of the Persian Gulf such a focus of importance for international oil security? What specific geographic feature of the Persian Gulf makes it so vulnerable to interruption and causes so much concern? Roughly what percentage of U.S. imports come from the Persian Gulf? Roughly what percentage of China's imports come from the Persian Gulf? Roughly what percentage of Japan's imports come from the Persian Gulf?

The Middle East accounts for about 30% of oil production and over 60% of oil reserves. Yet the Middle East is a very troubled region of the world. 20% of the world's oil supplies pass through the Straits of Hormuz. Saudi Arabia accounts for about 13% of world oil production and about 25% of world oil reserves. Yet Saudi Arabia is far from being a secure and stable regime. Other countries, such as China and Russia, have been adopting aggressive "petro-nationalist" philosophies that might conceivably take a big chunk of supply out of the world oil markets if "push comes to shove" in a global oil crisis.

What three key regulatory authorities over commercial natural gas activities were conveyed to the Federal Power Commission (and its eventual successor, the Federal Energy Regulatory Commission) under the Natural Gas Act of 1938? In other words, what key activities and transactions were the FPC authorized to regulate? What important specific categories and types of potential natural gas regulation were not conveyed to the FPC under the Natural Gas Act, either explicitly or apparently implicitly?

The NGA gave the Federal Power Commission (FPC) the authority to regulate the interstate gas industry in three ways: "Sales for resale" (wholesale gas sales) in interstate commerce This potentially included both "wellhead" prices as well as "city gate" prices, but wellhead price regulation appeared to be specifically exempted. Prices charged for pipeline transportation services provided in interstate commerce Federal certification of interstate pipelines and other facilities used for sales and transportation in interstate commerce

Briefly explain the early years of the development of the Anglo-Persian Oil Company. What two world powers were vying for influence in Persia and environs in the late 1800s and early 1900s? What famous phrase did Rudyard Kipling coin to describe this international contest? What were the main interests of these two countries in exerting influence over Persia and the neighboring area?

The Russians wanted to build a pipeline through Persia from Baku to the Persian Gulf and the British were interested in blocking Russia and developing oil themselves. The Persian monarchy was profligate, corrupt, and looking for money, and the British government was willing to accommodate them With the cooperation of the British government, William D'Arcy, an Australian millionaire and adventurer sought and was granted a 60-year exclusive oil concession covering about 75% of the Persian empire (the 5 northern provinces were excluded in deference to Russian concerns). D'Arcy agreed to pay: 1.40,000 British pounds upfront 2.16% of any net profits 3.A royalty of four shillings per ton of oil the British wanted to keep the company completely British, so the government recruited Burmah Oil to join the D'Arcy venture in 1908 struck oil (first significant oil find in the middle east)

Does the U.S. import much natural gas? If so, where does it come from primarily?

The US produces a lot of natural gas, so therefore does not import a lot, however it does import some which mostly comes from Canada. There are a few other countries that import gas including Trinidad and Tobago, Egypt and Qatar.

What are the bases for considering the federal administrative agencies and commissions to be a "fourth branch" of the federal government? In general terms, how is this fourth branch of government (i.e., these federal agencies) "controlled" or constrained in various ways by the three main branches of government (Executive, Legislative, and Judicial) that are explicitly established and empowered by the U.S. Constitution?

The administrative branch is like a fourth branch of government --- they regulate agencies, "independent" commissions - develops, adopts and enforces rules consistent with quasi-legislative authority delegated to it by federal statutes - the administrative branch is essentially "controlled" by the other three branches in differing ways: - the executive branch - appoints and removes agency head, can implement an execute agenda through Executive orders or policy and enforcement memoranda - legislative branch - change an agencies authority by amending its enabling statue, hold oversight hearings at any time, control the agencies budget through the annual appropriations process, amend the enabling state with a "sunset" provision to terminate the agency - judicial branch - interprets enabling statues, reviews complaints about agency procedures and appropriateness of agency adopted rules and regulations

What "conspiracy theory" do some people believe regarding the role played by Saudi Arabia in contributing to the collapse of the Soviet Union?

The conspiracy theory states that the US conspired with the Saudis to crash the world price of oil in order to add addition financial stresses to the USSR The financial stress in conjunction with the Reagan arms race ultimately caused the collapse of the USSR in 1991 The conspiracy theory states that the US conspired with the Saudis to crash the world price of oil in order to add addition financial stresses to the USSR The financial stress in conjunction with the Reagan arms race ultimately caused the collapse of the USSR in 1991

What was the basic goal underlying the authorization of the Synthetic Fuels Corporation? Was it intended to subsidize basic research and development into new synthetic fuels technologies, or did it have a more immediate and less speculative purpose? In practice, in general, what subsidy mechanism did the SFC use to support the projects that it selected to subsidize? Was the SFC successful in producing at least some of the results it intended to produce? If so, then why was it abolished?

The federal government has long shown an interest in producing liquid fuels synthetically from coal or oil shale given the abundance of these resources in North America. From about 1925 to 1953, the Bureau of Mines funded various experimental programs. Under the Energy Security Act of 1979, Congress approved the formation of the Synthetic Fuels Corporation and authorized it to financially assist the commercial production of synthetic fuels from unconventional sources (coal, shale, very heavy oil). $20 billion "fast start" program. Goals: 500,000 barrel per day equivalent by 1987 2,000,000 barrel per day equivalent by 1992 Congress cut funding to $10 billion in 1984, and in 1986, President Reagan signed a law killing the funding of any new projects and transferring existing project to the Treasury for "caretaker" administration and wind-down. Authorized funding methods in order of priority: Competitively solicited price guarantees, purchase agreements, or loan guarantees Outright loans Joint ventures (last resort) Several large projects funded by the SFC: Forest Hills Heavy Oil Project (East Texas) Injected pure oxygen to combust heavy in situ to enable recovery of remaining oil Unocal Oil Shale Project (Parachute, Colorado) SFC paid price supports; Unocal took technological risk of production Dow Chemical's Coal Gasification Project (Louisiana) "Straightforward" coal gasification project. Cool Water Coal Gasification Project (Daggett, California) Studied gasification properties of various western coals Joint project of Southern California Edison, Japan, EPRI, GE, and Bechtel Great Plains Coal Gasification Project (North Dakota) Still operating. Performance risk: you are only going to pay them when they produce a barrel of crude oil

In the earliest days of the gas industry, what was the source of the gas that was typically distributed by the local gas distribution companies (LDCs)? How was it made? What were the major drawbacks of this gas compared to natural gas?

The gas was seldom natural gas; it was so-called "town gas", typically manufactured by heating coal in an oxygen-deprived environment Gas manufactured from coal was a bit of a witch's brew: 50% hydrogen 25% carbon monoxide 25% methane More expensive than natural gas Created more residue and toxins

It appears that the U.S. government, especially the State Department, may not have been all that concerned about higher oil prices (within reason) during the early 1970s? Why might that have been the case? How might the Cold War and the relationship between the U.S. and the Saudis and the U.S. and the Shah of Iran have factored into this U.S. government viewpoint? What was clearly the U.S. government's overriding main concern during this period of international oil tensions?

The main reason the U.S. Government was not necessarily concerned about higher oil prices was due to the fact that higher oil prices provided a way for the US to be supporting Middle Eastern economies without having to give direct aid Petro dollars supported the economies that the US was already spending thousands of dollars supporting through foreign aid The U.S. government was beginning more and more to see low oil prices as a problem. Meaningful consumer conservation required higher prices. The West needed strong allied governments in the Middle East to counteract Soviet influence in the area. Higher oil prices were essentially foreign aid, and most of this bill would be paid by the other western countries—not especially by the U.S.

While U.S. consumers enjoyed lower oil prices as a result of the oil price collapse of 1986, the U.S. government had several reasons for feeling at least somewhat ambivalent about these radically lower oil prices. What were these reasons?

The politically influential independents were getting hurt, the US government was favoring the higher oil prices ( US's opinion was that too low of oil prices may be too much of a good thing) The US took some actions which included: Proposed a 4$ import tariff, which was eventually defeated by consumer states Fill the SPR faster, which was never adopted Send V.P. George Bush to Saudi Arabia to talk to King Fahd Overall the US policymakers had mixed opinions on falling oil prices 1. Destruction of US domestic production 2. Caused prolonged economic recession 3. Threat to world financial markets due to previous heavy borrowing by some oil-producing countries 4. Undermining of domestic investments in alt. Energy sources and conservation 5. Likely return to higher imports and increased energy dependence 6. Jeopardy of US arms sales 7. A threat to the "veiled foreign aid" of higher oil prices paid to the middle east

how does the Oil Sharing formula within the ESS provide that the burden of an oil interruption be shared among the members of the IEP who are routine and regular oil importers? What "counterintuitive" and likely very politically unpalatable pattern of oil sharing might this oil-sharing formula call for in the event that emergency oil sharing is ever invoked?

The pooled shortfall is shared among members in accordance with their share of the IEP members' collective oil imports. It ignores domestic production strengths. Therefore, countries that are heavily import dependent, will end up with obligations to absorb a greater portion of the collective shortfall. (This protects countries with strong domestic production from having to share more due to their domestic production.) In 1984, and economist (Henderson) performed a simulation based on a 10% interruption of world oil supplies and found that Italy, Japan, and West Germany would have had to send oil to the U.S., U.K., and Canada. One might reasonably wonder whether this is really going to happen if an emergency situation arises

In what sense was the Iran-Iraq War from 1980 to 1988 at least partially about oil?

The war: in 1979, Iranian leader called upon Iraqi Shia Muslims to overthrown the Sunni Muslim regime of Saddam Huessin (who probably had an oil agenda --- Saddam had seen an opportunity to annex Iran's oil-rich Khuzestan Province) -Iranian agents attempted to assassinate Iraq's prime minister, which gave Saddam a reason to attack Iran in 1980

How did Eisenhower use "the oil weapon" to end the 1956 Suez Canal Crisis and compel Britain and France to withdraw their troops from Egypt? In what sense did Eisenhower have Britain and France "over a barrel", so to speak?

in 1869, the Suez Canal was completed with a joint venture between the Egyptian government and a french company, and in 1875, the Egyptian gov sold it to the British after a military coup in 1952, Gamal Abdel Nasser became the dictator in 1954 (he wanted to create an Arab state with populist ideals) in 1955, in placate Nassar, the British and the US began discussing loaning Egypt money for the Aswan dam, however, after backing out, Nassar seized control of the Canal in 1956, despite the lease ending in 1968 what followed was an attack by the British, French and Israel Eisenhower was unaware of the above plan and after the Israeli invasion, Eisenhower sought UN endorsement of economic sanctions against Israel until they withdrew On October 30, Britain and France(Allies) vetoed the U.S.-proposed resolution in the U.N. Security Council and launched an air raid on Egypt under the guise of "protecting the Canal" and wiped out the Egyptian air force. However, especially with the Canal blocked, Eisenhower recognized he had the upper hand in determining the final outcome because substantial oil shipments were now cut off and Britain and France would need U.S. cooperation in supplying them oil until the Canal could be re-opened. Eisenhower also threatened the British that, if they did not agree to quickly withdraw their troops, he would sell massive amounts of British bonds held by the IMF as part of European Reconstruction on the open market thereby pushing Britain into a devaluation of the pound.

What was meant by 50-50 profit sharing in the oil industry? Where did it originate? To where did it quickly spread? How did it differ from previous concessionary arrangements? How did it fundamentally change the alignment of incentives between the companies and their host governments compared to the financial arrangements previously contained in the typical concession arrangements?

Venezuela achieved 50-50 profit-sharing. Did that because of Mexico's nationalization their oil company and the Westerns did not want that to happen in V. Very importantly, the Venezuelans insisted on getting a portion of their 50-50 shared profits in the form of physical oil. In view of Venezuela' successful accomplishment of 50-50 profit sharing, the Saudis became dissatisfied with their slice of the oil pie. However, the Saudis were afraid that by asking for a larger share of profits they might encourage a shift away from the production of Saudi oil. They looked for a way to have their cake and eat it too. They found the solution in the U.S. tax code. The U.S. tax code allowed income taxes paid to foreign governments to simply be deducted from U.S. taxes (the foreign tax credit). If you do international business and pay international tax's, we will let you take those taxs against US tax bill. The Saudis simply convinced Congress to pass a law that allowed oil royalty payments to be treated like a foreign tax and credited against U.S. income taxes. In 1951, the Saudis negotiated 50-50 profit sharing. The oil companies recognized that this formula had the "ring of equity" and was likely inevitable. The new foreign tax credit meant that the increase did not adversely affect the companies very much because they just credited it against their owed U.S. income taxes. Essentially, the Saudis were given the benefit of an off-budget "tax expenditure".

What was the institution of the "posted price"? What did it have to do with administering 50-50 profit-sharing arrangements? Why did the "posted price" seem to be needed and seem to make sense when it was originally adopted? In what way did it become a problem for the oil companies over the passage of time? What very important instrumental role did it play in the formation of OPEC?

When oil companies agreed to 50-50 profit sharing, they had to come up with a credible way to determine the "transfer" price(internal) of oil within their vertically integrated corporate structure. They came up with a concept called "the posted price" of oil. "The posted price" was simply a price at which they agreed to sell oil to anyone—including unassociated third parties. Thus, it was a price that they would have no motivation to understate. This posted price would then be used to calculate the revenues used for determining profits in the profit-sharing formulas.

What major forces external to OPEC likely contributed to the collapse of oil prices in 1986?

Worldwide recession Fuel switching in power plants (switch from fuel oil to coal, natural gas, nuclear) Nuclear power plants non-OPEC sources of crude oil Public policies (CAFE standards, building insulation, improved efficiency standards, deregulation of natural gas prices) Simple market-driven conservation

To the extent that there is validity to the notion that international oil companies exploited their host countries in the developing world, what are the best substantive arguments supporting this viewpoint? In other words, in broad terms, what were the alleged avenues and vehicles by which the international oil companies accomplished this alleged exploitation?

YES: The discouraged competition from the independents in order to maintain their "monopsony" status for as long as possible; They retarded the ability of the countries to run their oil industries by not training local technicians; From time to time they solicited their home government's diplomatic efforts and interference in the host countries; and They controlled the downstream oil distribution channels for disposing of the oil.

"The Great Transition" refers to the many economic and political trends and events that laid a fertile foundation for the massive restructuring of the oil concessions in the international oil industry in the early and mid 1970s. List and very briefly identify as many of these major trends and events as you can.

acceleration of the growth of world demand energy steady increase in petroleum's share of energy simultaneous economic booms in US, Japan and Europe US environmental initiatives encouraged fuel switching from coal to fuel oil in power plants (not a good idea) firming the world oil prices leading up to the eventual elimination of the US mandatory oil import program (Us is more vulnerable to world oil prices) Rising importance of Persian Gulf and North African oil in total world oil supplies Disappearance of excess oil production capacity outside of OPEC and inability of the U.S. to continue serving as "the supplier of last resort"; Prorationing MDFs were increased to 100% in March 1972. Environmental initiatives discouraging oil drilling and development in certain environmentally sensitive areas Santa Barbara oil spill in 1968 leads to ban on offshore drilling on California coast Delays in building the Trans-Alaskan Pipeline from Prudhoe Bay to Valdez U.S. hit "peak oil" production in 1970 (at least for the moment) International political developments encourage more aggressive actions by host governments Continued retreat of both Britain and France as world colonial powers U.S. gets bogged down in Vietnam War (domestic politics would not have supported any military action in the middle east at this time)

What was "supplemental gas"? Give some broad generic examples of such projects? Why did many people think that pursuing these expensive projects might be a good thing to do? Did they have much practical impact? Why or why not?

alternative and very expensive sources of gas - liquified natural gas form foreign sources such as Algeria - high BTU coal gasification projects, great plains project - Gas from Alaska and the Canadian arctic the gas industry tried to fill the gas shortage gap regardless of the cost, which resulted in low gas prices, shortages and high-cost incremental supplies of "supplemental gas", not in the interest of the consumers, waste in terms of expenditure when they could have deregulated gas

What major worldwide economic events and trends were working against OPEC as it tried unsuccessfully to maintain high oil prices in the first half of the 1980s?

in 1980, the Saudi's were concerned that oil prices were getting too high, so they began producing oil near the max. capacity - OPEC fell into chaos, while the Iran and Iraq war is going on, with both countries cutting down on production - When prices began to soften, the Saudi's refused to cut production unless the other OPEC countries agreed to restore OPEC "pricing unity"

The early history of the world oil market is one of competitive duopoly with a competitive fringe. Briefly, there were duopolies in both the European and Far Eastern markets? Who were the two main national players in the international duopoly in the European market in the late 1800s? What is the best statistical evidence that this duopoly may have had a formal agreement among the players (although no documentation of a formal oligopoly has ever been found)? There is solid evidence that the key members of this oligopoly met in Paris in 1893 to solidify and extend this oligopoly, although appearing unsuccessful in holding the duopoly together. Who were the key players who met in Paris in 1893? Why did their efforts fail; what source of competition was most responsible for eventually eroding this duopoly near the end of the 1800s?

in the 1890's, there were three big oil rivals: 1. Standard Oil 2. the Nobles 3. Rothschild/Samuels the initial emergence of the U.S- Russian Duopoly With Robert Nobel's invention of a way to refine the Baku oil into a high-quality kerosene, the Branobel oil was quickly able to under-price Rockefeller's Standard Oil and push it out of the Russian market. The data suggests that Nobel and Rockefeller may have reached a market-sharing accommodation for several years (consistent shares in percentage from 1880-1892), but, if so, it soon fell apart after the Paris meeting Attendants of the Paris meeting Rothschild, Rockefellor, & Nobles) Competition from the independents (i.e. not one of the main big players) eroded the duopoly near the end of the 1800s

What were "mandatories" or "mandates" under the Treaty of Versailles (and the League of Nations) following WWI? What eventually important oil areas in the Middle East were made British "mandates" after WWI? What mandates were assigned to France and what did France do to assure that it would be able to participate in any post-WWI oil development in the Middle East? What was the nature and source of the tensions between America and Britain that arose regarding these British mandates very quickly after WWI? In general, how was this tension resolved; Specifically, what accommodations did Britain make?

mandates: allocated former colonies or land to allied rule: England got Palestine, Mesopotamia (Iraq) France got Syria, Lebanon Following WWI, the Allied Supreme Council met at the Paris Peace Conference and sliced up the Ottoman Empire into various "mandates" to be administered by Britain and France with the stated objective of eventually establishing democratic home rule in these areas. As part of the partitioning of mandates, the French were concerned that oil would eventually be found in Iraq and that it's development would be dominated by "the Anglo-Saxon Trusts". Therefore, in the San Remo Agreement in 1920, the French insisted that Deutsche Bank's share in the Turkish Petroleum Company be handed over to Compagnie Fancais des Petroles (CFP)—today named "Total". America interest in Iraq: Beginning around 1920 (with the USGS Report), the U.S. government was becoming concerned that the U.S. oil reserves were being rapidly depleted. Wanting to go into Middle East because that looks like oil future. American oil firms were also looking more and more at the prospects for developing oil internationally. Traditionally, in their Middle East "protectorates" the British had enforced a "British Nationality Clause"—foreigners could invest, but they would have to be minority partners in a British enterprise( they will have 51% say.(not Paris peace conference stuff) Following the Paris Peace Convention, the British were supposed to follow an "Open Door" Policy to foreign investments in their Middle Eastern mandates. Britain was also stretched financially and needed development capital in the Middle East; it also wanted to preserve the British-American Alliance.

What economic forces and events led to the formation of OPEC? What were the early officially adopted objectives of OPEC? How successful was OPEC in achieving these objectives prior to 1970? What internal and external factors tended to limit the effectiveness of OPEC during its first decade of existence? What were the most important achievements of OPEC during this first decade?

oil company reductions in the posted price result in the formation of OPEC British Petroleum was the first company to say "UNCLE" and reduced its posted price by 18 cents (about 10%) in early 1959. By happenstance, the First Arab Petroleum Congress was scheduled to meet shortly in April 1959. The conferees (which included Venezuela as an observer) issued the Mehdi Pact calling for: 1.An increase in payments to host countries 2.Prior consultation on any reductions in the posted price 3.Establishment of an institution to coordinate production In August 1960, without any consultation, a new "tone deaf" Exxon management team announced a unilateral reduction of 14 cents (about 7%) in the posted price. All the majors followed suit. Meeting in Baghdad in September 1960, Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela formed OPEC. the beginning of OPEC was timid and Venezuela took the most radical position they began with 3 moderate resolutions: 1. roll back the posted price reductions 2. study ways to stabilize world oil prices 3. establish a permanent OPEC organization with a permanent secretariat what they accomplished: 1.to begin to form bonds of solidarity and commonality among its members; and 2.To provide a forum for the host countries to develop and share their own knowledge and expertise about the oil industry.

In very broad characterization, what has been the general "trend" in natural gas production and consumption in the U.S. since 1970?

prior to the 1970's, gas consumption was rapidly increasing, but since the 1970's gas consumption has dipped and risen, leveling out

What economic factors and considerations caused both producer states and consumer states to have potentially strong interests (generally very different from one another) in regulating the activities of interstate pipelines?

producer states_ - where one pipeline served a gas field, it could exert monopsony power. It could also discriminate in favor its production affiliate and exploit the "rule of capture" - gas exports out of state created competition between local and consumers and distant consumers, driving up consumer prices - resulting political pressures: minimum prices for gas suppliers, non-discrimination in purchasing by pipelines, limitations on gas exports out of state consumer states_ - the adv. of natural gas over manufactured gas created pipeline "rent" that could be captured through cost-of-service regulations of "city gate" prices - pipeline monopoly power seemed to warrant such max. price regulation (many communitites were served by only one major pipelines) - resulting political pressures: federal regulation of "city gate" prices charged by interstate pipelines

What was OAPEC and how/why did it come into existence? What principled position did it initially adopt toward oil embargos and using oil as a political weapon? Ironically, what action did OAPEC take in October 1973 during the Yom Kippur War?

the 1967 Six Days war brought about OAPEC Nasser's prestige among Arab nationalists was slipping and he didn't want to be "out radicalized" by Syria. So, he: 1.Formed a coalition against Israel with Syria, Jordan, and Iraq 2. Evicted U.N. observers from the Sinai 3.Once again blockaded Israeli shipping in the Gulf of Aqaba Syria began amassing troops along its southern border in the Golan Heights, and other troop preparations were apparent. On the morning of June 5, 1967, the Israelis launched a massive preemptive attack against all of the prospective Arab belligerents. The war was pretty much over in the first 48 hours. By the third day, the Israelis had reached the east bank of the Suez Canal. Ever since this war Israel has occupied the defensive buffer zone of the Sinai and the Golan Heights, and also the West Bank and Jerusalem In response to the Israeli attack, the five Arab oil ministers of Saudi Arabia, Kuwait, Iraq, Libya, and Algeria called for an oil embargo against the U.S. and Britain. The two Arab pipelines to the Mediterranean were completely shut down. The immediate loss of oil was a very significant 6 mbd. This interruption was even larger than during the Suez Crisis. The U.S. launched an emergency program to supply the shortfall and fortunately there was enough U.S. spare capacity to do so (along with its allies Venezuela, Iran, and Indonesia). Afterwards, in early 1968, three of the most conservative Arab countries (at the time)—Saudi Arabia, Kuwait, and Libya—met and disavowed any future use of oil embargoes as a strategic weapon. They formed a new group called the Organization of Arab Petroleum Exporting Countries (OAPEC). Ironically, in 1973, it would be OAPEC that declared a second oil embargo.

Why did the U.S. government put pressure on Chevron and Texaco to open up their attractive Aramco partnership to additional partners? What additional oil companies were eventually invited to buy their way into the Chevron-Texaco Aramco partnership? How did these companies join the Aramco partnership without violating their apparent obligations under the Redline Agreement?

the U.S. Marshall Plan quickly reconstructed Europe, aimed at countering further Soviet incursion into Europe during the Cold War would need a large supply of oil. Chevron and Texaco owned the Saudi oil concession but they were relatively small companies at the time and needed additional resources to develop the vast resources that they soon discovered in Saudi Arabia. The best and most economical way to get oil to Europe would be the construction of a very expensive ($100 million), but cost-effective pipeline—the Trans-Arabian Pipeline ("Tapline"). the preponderance of Persian Gulf oil was transported to Europe through the Suez Canal. Chevron and Texaco needed more capital to quickly develop the Saudi fields and the U.S. State Department encouraged Chevron/Texaco to take on more U.S. partners. In 1944, Jersey (Exxon) and Socony (Mobil) began negotiating to participate as partners in Aramco. In 1946, Exxon and Mobil were reminded of the constraints of the Red Line Agreement, and they repudiated it in order to participate in Aramco. Based on the fact that Britain had taken control of the French shares of Turkish Petroleum during the Nazi occupation of France in WWII, Exxon and Mobil lawyers argued that the Red Line Agreement had become null and void under the doctrine of "supervening illegality". In 1948, Chevron and Texaco sold 40% of Aramco to Exxon and Mobil for $470 million. Initially, Exxon and Mobil had planned to split their ownership share in half, but Mobil was concerned about the security of the Saudi government and pared its share back at the last minute. Exxon needed crude oil and was happy to take Mobil's share.

What major events of worldwide importance buffeted the oil markets in various ways during the decade of the 1990s? In general, how did OPEC fare during the decade of the 1990s?

•The Saudis had filled most of the gap created by the removal of Kuwaiti and Iraqi oil in during and immediately after the First Gulf War. •By 1992, the OPEC countries had slowly slipped back into their bickering about quotas. •From 1986 through 1996, OPEC maintained a target price of $18 and the actual price wandered between $15 and $20 per barrel. •In late 1996, actual prices inexplicably increased to around $25. •OPEC raised its output level to combat the sudden run-up in price, but then the Asian financial crisis hit, oil demand fell, and oil prices declined to around $14. •In early 1999, the price actually sank below $10. •However, later in 1999, OPEC once again rose from the ashes, reduced output by 1.7 mbd, and managed to restore a price of $18-20. •In 2000, OPEC production was cut by another 5 mbd and the price increased to around $30.