Investing in Oil and Gas- the ABC's of Dpps (Direct Participation Program)

the United States of America.

By Kathy Heshelow

, 2010, Printed in

The story of oil and gas spans thousands of year and has a long and fascinating history. The development of oil
and gas has evolved over time and its uses have also expanded, becoming an integral part of todays global
economy. The use of oil eventually replaced coal as the worlds primary source of industrial power in the early
20th century and still remains the critical fuel source that powers industry and transportation.
Many are surprised to hear that ancient cultures used crude oil as a substance for biding material and as a
sealant for waterproofing various surfaces. Five thousand years ago, the Sumerians used asphalt to inlay
mosaics in walls and floors. Mesopotamians used bitumen to line water canals, seal joints in wooden boarts
and to build roads, it was used to preserve mummies. The Bible refers to pitch being used for building purposes
cementing wallsin Babylon. Ancient Persian tablets indicate the medicinal and lighting uses of petroleum in
the upper levels of their society. By 1500 BC, techniques for lighting consisted of a fire pan filled with oil made
of a certain volatility so that it would burn slowly and not cause uncontrollable flames or explosions. Over time,
the wick oil lamp replaced the fire pan using flammable oil similar to todays kerosene lanterns.
The Chinese were the first to discover underground oil deposits in salt wells, and they quickly recognised the
importance and potential use of oil and gas. Around 500 BC, ancient Chinese history describes wells over 100
feet deep containing water and natural gas along the Tibetan border. The Chinese constructed extensive
bamboo pipelines drawing from the wells in order to transport oil and natural gas, used for lighting. By 1500 AD,
the Chinese were exploring and digging wells more than 2,000 feet deep.
Incendiary weapons at sea were used by the Byzantines in the suppression of a revolt against the Emperor
Anastasius I in 513 AD. Around 670 A D, the Emperor Constantine IV used burning petroleum thrust out from a
device onto enemy ships. Romans used flaming containers of oil as weapons. Incendiary or flaming weapons
had been used in warfare for centuries prior to the invention of Greek fire, including a number of petroleum
and bitumen-based mixtures; however, Greek fire was difficult to extinguish and could burn on water, making it
a devastating invention. Greek fire may have been a form of naphtha or another low-density liquid
hydrocarbon, as petroleum was known to Eastern chemists long before its use became widespread in the
1800s.
The Romans used oil surface deposits for burning lamps. Petroleum was known as burning water in japan in
the 7th century. The Middle Easts petroleum industry was established by the 8 th century, when the streets of the
newly constructed Baghdad were paved with tar, derived from petroleum that became accessible from natural
fields in the region. Petroleum was distilled by Persian chemist al-Razi in the 9 th century, producing chemicals
such as kerosene.
During the mid 13th century in the city of Baku in Azerbaijan, inhabitants devised methods and collected from oil
seeps in the surface. By the mid 1590s, shallow pits of about 115 feet were dug at Baku to facilitate the
collecting of oil, which were in essence primitive oil wells. In 1650, Romania was the site of Europes first
commercial oil reservoir. This site was amajor source of oil for Europe. More than 200 years laters, Ploesti,
Romania became the site of the worlds first oil refinery. The earliest mention of American petroleum occurs in
Sir Walter Raleighs account of the Trinidad Pitch Lake in 1595; 37 years later, the account a Franciscan,
Joseph de la Roche dAllion, about the oil springs of New York was published in Sagards Histoire du Canada.
Oil sands were mined from 1745 in the Alsace region of France by special appointment of Louis XV.
In the early 1800s, merchants built damns that allowed oil to float to the waters surface in an area within
Western Pennsylvania called Oil Creel. A technique was employed by placing blankets in the water, letting
them soak with oil, and the oil was then retrieved by wringing out the blankets. In 1849, Abraham Gesner, a
Canadian geologist, distilled bituminous tar to produce coal oil, calling it kerosene, and eight years later, with
the invention of the kerosene burner, it became a highly-desired illuminant (replacing whale oil). Interestingly, in

1854 Benjamin Silliman, a professor at Yale University, was the first to fractionate petroleum by distillation. This
discovery rapidly spread around the world, and the first Russian refinery in the mature oil fields at Baku was
built in 1861. At that time Baku produced about 90% of the worlds oil.
The first American gas well was drilled near Fredonia, NY in 1821, and the first oil well was drilled in 1859 in
Pennsylvania by Edwin Drake. The modern oil and gas industry was born in the later 19 th century. As Colin
Campbell tells us, the Industrial Revolution was already in progress being driven by the steam engine, fuelled
by coar. But then in the 1860s, a German engineer found a way to insert the fuel directly into the cylinder
inventing the Internal Combustion Engine, which was more efficient. At first, it used benzene distilled from coal,
before turning to petroleum refined from crude oil. The first automobile took to the road in 1883 and the first
tractor was used in 1907. The chap and abundant supple of energy changed the world in then unimaginable
ways, lading to the rapid expansion of industry, transport, trade and agriculture, which has allowed the
population to expand six-fold in paralled. 1Today there are more than 600,000 producing oil wells in the Us and
more than 200, 000 gas sells, even though we are not the largest producer. 2
The invention of the kerosene lamp in the mid 1850s led to the establishment of the first US oil company, the
Pennsylvania rock oil comppnay. However, the first major oil company was the Standard Oil Company founded
by John d. Rocefeller in 1870. Standard Oil built its first oil refinery in Pennsylvania, and later expanded its
extensive operations nationwide. After a decade of fierce competition, Standard Oil became the industrys most
dominant company controlling 80% of the distribution of all principal oil products, in particular kerosene.
In 1909 as result of antitrust laws, federal courts ordered the break up of the Standard oil company, dividing it
up into 34 seperate companies.Standard oil dominated the first two decades of the oil and gas industry, and the
US accounted for more than half of the worlds production until around 1950. As the industry became more
global in nature, other world markets in Europe, Russia and Asia, began to play a much greater role. New
industry giants emerged such as Shell, Royal dutch, and anglo-Persian which later became British Petorleum.
The major companies were founded as follows: Standard oil Company founded in 1870; gulf Oil, in 1890;
Texaco, in 1901; royal Dutch Shell, in 1907; anglo Persian Oil company, in 1909, Turkish Petroleum Company,
in 1910.
As the oil industry unfolded over several decades, Standard oil of New Jersey later became Esso, then Exxon;
Standard Oil of New York became Mobil, and Standard Oil of California is now Chevron. Along with royal Dutch
Shell, Texaco, Gulf, and British Petroleum (BP), these oil giants became knwon as the sever sisters.
Among the nations that wee becoming industrialised, America had the best supplies and was the first to find
and market oil in commercial quantities as well as make widespread applications to the infrastructure and
transportation. Since then, we have never ceased being the world largest consumer of oil and gas.
WWI marked the beginning of an ear where oil played a truly major role. At the beginning of that war, as Peter
Tertzakian points out, the British went to France with 827 motocars and 15 motorcycles. By the end of war, the
British had 56,000 trucks, 23,000 automobiles and 34,000 motorcycles; they went from 250 planes to 55,000
during the course of the war.It isnt surprising that oil war essential to them. The entry of the US into the war
helped tip the balance for the Allies, in part due to oil supplies and reserves that the US brought. Lord Curzon
famously said, the Allies floated to victory on a wave of oil. 3
The mind-set of post World War II US was that oil would always be available in abundant and unlimited suppl.
Further, the mind set was that America dominated it so forcefully through the US oil companies (with their
power and influence), that there were little concerns over security. At that time, about half of the worlds reserve
were controlled by the US. Today only 6% of worldwide reserves are held by investor-owned oil, nongovernment controlled companies.) in the 1950s, American-based oil companies produced 45% of foreign oil
but this has dropped to 10%.
At the beginning of the 20th century, oil production was dominated by three regions: the US Russia and the
Dutch East Indies. However, during the first decade of the 20 th century, major efforts were underway to explore
and develop oil production in the Middle East. Oil exploration bean in Persia (what is now Iran) followed by
turkey . in the late 1930s, the Burgan oilfield was discovered in Kuwait. A decade later, the Ghawar oilfield was
discovered in Saudi Arabia, and it still remains the largest oil field ever discovered. After WWII, joint American
and Saudi commercial oi enterprises were formed creating conglomerates, such as Casco (California Arabian
Standard Oil company) and Caltex (California Texas Oil Comopany). Eventually, Esso (Exxon) and Mobil joined

the Standard oil Company of California to form Aramco(Arabian American Oil company). Within the US, early
oil finds in New York and Pennsylvania were outpaced by demand and led to oil booms in California, Texas
and Oklahoma.
We have now experienced some world oil shocks due to political and economic situations. The first oil schok
occurred in 1973 as a result of the Yom Kippur war in the middle East. This war and its political effects caused
an enormous increase in world oil prices, and showed us a new vulnerability. Oil embargos were instituted
during this time period by the oil exporting counties in the region, reducing world oil production. In fact they
blocked just 5% of our imported oil, but its resulted in quadrupled prices. 4
Following this first oil shock, which resulted in oil supply shortages for countries targeted by the embargo, the
industrialised counties targeted by the embargo, the industrialised counties established the International
Energy Agency (IEA) in 1974. This agency within the OECD (Oganisation for Economic cooperation and
development) was made up of over 20 countries including the US, Canada, Western Europe and Japan. Its
objectives are to promote cooperation in reducing dependence on oil, information systems, and ensuring fair
and effective management of resources.
The second oil shock occurred in 1979, again causing dramatic increases in world oi prices. This oil shock was
the result of the Iranian crisis caused by political and social upheaval in Iran, which led to strikes in most sector
of the economy, in particular the oil industry. Iranian production fell from 6 million barrels per day in September
1978 to 400,000 barrels per day in January 1979. Saudi Arabia initially increased production to compensate for
the Iranian supply shortage, but later placed a ceiling on its production. These series of events led to escalating
oil prices and uncertainty with the world oil market.
Following these two crises, there was much attention and media coverage about oil supply levels and the
concern over oil being a limited resource that would eventually run out. However, a period of inceased
production and reduced demand caused an oil glut in the 1980s. James Schlesinger, the first US energy
secretary, has said for decades that when it comes to energy policy, the US toggles between complacency and
panic. 5 The energy Cycle as mentioned by Peter Tertzakian illustrates the point well (discussed in the
previous chapter).
We had a glimpse of a new energy shock, when the price of barrel of oil climbed to $ 140. What may indeed
infold going forward is a more sustained oil shock. As the CERA Break Point study points out, the fact that the
world could take $80 in its stride in the context of strong economic growth does not mean that a price that is
60% higher at a time of a credit crunch will be so easily assimilated. The economic toll is mounting. Airlines are
certainly in shock as they start charging for checked luggage to find a way to pass on their biggest cost.
Carmakers are reeling. Retailers are tracking the shrinking wallets of their customers. The rising prices for food
reflect, in part, the impact of higher energy costs...prices at such levels create their own negative effects on the
world economy...Consumer confidence plummets and companies suspend decisions on major capital projects.
Political leaders plead for energy conservations and driving restrictions are introduced in several major cities.
6 At the end of 2007, as oil was heading towards $100 for the first time, the US congress passed the first bill
requiring an increase in automobile fuel efficiency in 32 years. Consumers now want to buy fuel efficiency
instead of SUVs. Hybrids are going from fringe to mainstream and a concerted assault has been launched on
the problems of battery technology. The economy and makets crashed in late 2008 and are still trying to
recover in 2010. Prices and demand fell, though oil prices rose again in 2009 and have remained between $70
and $80 per barrel. The recession,
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Imports, there is an important fact to note. American dependence on foreign imported oil has grown from 10%
in 1970 to 65% by 2004. But when you consider supply, it is worse. With 945 of the world;s oil supply locked up
by foreign governments, some of which is held by countries that may be hostile, the relatively puny American oil
companies do not have access to enough crude oil to significantly affect the market. Thus, Exxon Mobil buys
90% of the crude oil that it refines for the US market from the big players. The price at the US pump is rising
because the prices the big oil companies charge Exxon Mobil and the other American companies fro crude oil
is going up 8

In most major producing countries, the government owns the rights to develop the resources. In the US much
of the land is privately-owned and the decision to explore and produce oil is between the land owners and the
producing company. That is a big difference from most of the world, and important for investors to understandinvestors in the US have opportunities that many others dont when it comes to direct participation investment
programs.
An interesting comment was made by the dean of oil analyst, Charles Maxwell, on the Charlie Rose Show,
June 10th,2008. He said something to the effect that he think the large oil companies have now become too
large or cumbersome and they are slowly dying, while the young, middle size or smaller oil companies are the
future they are more mobile, flexible and are generally entrepreneurs who can more deftly adjust to the
markets. (9)
Fundamentals of Investing in Oil and Gas
By Chris Termee

For more than 6000 years, crude oil has played and important role throughout the early stages of human
existence. In the cradle of civilization, man witnessed natural occurrences of crude oil flowing from the ground
and soon recognized its potential for many uses. For example, even the earliest trade routes, including some
that still exist today as roads, used this product to help accommodate larger amount of traffic.
It was not long before his seemingly magical substance was weaponised. Humans soon realised that crude oil
could impact a military advantage. After the split between the East and West Roman Empires, a weapon known
as Greek Fire started terrorising ship crews around the world. Discovered by Assyrians in the 7 th century AD,
this is so-called liquid fire was launched upon enemy ships, which eventually made them sink. Romes
enemies grew to fear this mighty weapon. Crews found themselves unable to put out the fires it caused. It was
said by survivors that even the ocean floor burned under its effects. The details of how to make Greek Fire
remained closely held secret, passed down from one Emperor to the next. The sheer terror inflicted by this
devastating technology influenced such modern weapons as napalm and flamethrowers.
Despite these fascinating early uses, the manner in which oil stepped into its modern role is one of the most
inspiring stories of our civilisations progress. This tale is focused on just a feeew men who lived back in the
mid-1800s. the first Samuel Kier, who owned a Pennsylvania salt mine. Mr. Kier was unintentionally hitting oil
deposits while his men were diggin for salt. Kier initially saw no use for this substance and disposed of it as fast
as he could as it frequently ruined his workers clothes. Later on, however, Kier observed local Seneca Indian
using this oily substance as tropical remedy for skin. Based on this observation, he started to sell the oil as a
new medicinal product known as Rock Oil under his newly formed Rock Oil company. Kier never made a
fortune with his medical oil, but he gained recognition for trying. In one of historys many ironies, 30 years later,
in 1872, Robert Chesebrough would resume Mr. Kiers work and produce what is known today as Vaseline.
Around the same time, in 1854, George Bissel observed crude oil polluting the surface of a pond. Mr. Bissell
and his business partners soon noticed its unusual burning characteristics. These men were the first to have
the idea of creating a heat and light source that could potentially replace whale oil. This was a fortunate time for
such a discovery as a whale oil was the primary resource for lighting. Whale was clean burning and gave a
brighter light than candles and fuels made by beeswax and other animal fats. Starting in the first half of the
nineteenth century, market prices for whale oil were sharply increasing due to lack of supplies caused by
overfishing.
To determine the commercial viability of crude oil as a light source, Bissell contacted Professor Benjamin
Sillman of Yale University for a second opinion. Sillmans objective was to determine if crude oil could yield a
more affordable product than whale oil. He made a phenomenal discovery when the crude oil underwent a wellknown process called distillation. With distillation, a liquid mixture is heated such that certain components
separate from one another during controlled evaporation. The separated vapors are later collected through
condensation. One of the isolated substances left over from oil distillation was kerosene.
Professors Sillmans discover confirmed that crude oil had the potential to be commercially competitive with
whal oil, leading him to recommend that Bissell find larger quantities of this substance.
It wasnt long before Bissell found out about Mr. Kier and his previous attempts to sell crude oil as medicinal
rock oil. Mr. Kier had the experience and knowledge necessary to extract the amount of crude oil needed to

economically produce kerosene. The se gentlemen soon got together and started the Pennsylvania Rock oil
company, which was the very first company solely dedicated to drilling for oil with the use of salt mining
derricks. Knowing that they would need large amounts of capital from investors to make this work, they brought
on board a man named Edwin Drake.
Drake is one of the more interesting characters in this story. As the man in charge of drilling operations, he was
given the nickname Colonel to convey professionalism to investors who were nervous about participating in
something that had never been done before. Drake was actually never in the military, nor did he have
experience in drilling for salt, much less oil, but was actually a railroad conductor by trade.
On August 27, 1859, Drake and the investors struck oil at a depth of 69 feet. The first oil well produced 15
barrels a day. The field was later called Oil creek, located near Titusville, Pennsylvania.
Despite Drakes lack of experience, he was a pioneer. He recognised many problems still faced by modern
drilling. Out of necessity, he invented new techniques and contraptions, such as the use of stove pipe to
prevent water from collapsing the borehole of a new well. This was the foundation of modern-day surface
casing. Colonel Drake never patented his inventions and never acquired significant wealth, despite being a key
pioneer in what is not one of the larges industries in the world.
The gamble paid off, and the publicity of Drakes well started an oil boom. A new industry was born based on a
new heating and light source, called kerosene, produced from oil drilling. Drakes well brought amenities to the
rapidly growing middle class that were previously available only to the wealthy. Our history records the
importance of creating fire as a pivotal step in mankinds evoloution. By bringing light to the masses, the
discovery was a major step forward in our societys development.
The oil boom was comparable to the California gold rush just 10 years earlier. The similarity was so sharp that
oil quickly became known as black gold. No one knew the boom would be so successful, or so sudden. In
fact, it was so sudden that it was impossible for any advance planning for things like transportation
infrastructure. There were no pipelines or railways near the early oil fields.
At this time, the industry was still in its infancy as crude oil was collected in whatever container were available.
Wooden whiskey and wine barrels were some of the most efficient containers in the early years. These
containers were then transported by horseback from the field to the refinery. Todays infrastructure involving
such things as railroads and pipelines was not available until the 1870s.
In January 1860, a barrel of crude oil sold for $18, which was less expensive than the same amount of whale
oil. The oil boom was so intense that, just 2 years later, the price of the same barrel of crude crashed to just 10
cents. This collapse in prices brought many problems to the industry. Early pioneers were naturally driven by
making as much money as possible, as fast as they could. Unfortunately, by doing so, a great deal of crude oil
was made recoverable by the drilling of too many independent wells in one area. A detailed explanation of
these geological concepts will be made in a later chapter.
The unregulated, every man for himself element meant that oil reservoirs were being tapped without planning
or coordination. The importance of pressure was not understood as it directly relates to field longevity, including
such factors as natural gas pressure, water pressure, porosity and well throttling. Most people would be
surprised to learn that many operators today in the US still struggle to understand these important concepts
and often make financially disastrous mistakes.
In an attempt to address these issues, many states now regulate when and how far apart each well can eb
drilled with a permitting system. It is illegal to drill wells without a permit. Obtaining a permit from the state can
be burdensome for many independent oil companies. Different states have strict rules or regulations requiring
specific, detailed information to be submitted pertaining to the drilling location. If inaccurate or incomoplete
information is submitted, lengthy delays will be the result. Despite the frustrations, one should be assured that
the permitting process and certain other regulations are ultimately for everyones protection.
Having solved the widespread problems of over-development with the creation of a permitting system, the early
industry still lacked standards for oil quantity and quality. Back then, a trader could purchase a barrel of crude
and get 30 gallons one day, and the next week acquire a completely different amount of oil for the same socalled barrel. It would be many years before this was resolved. Todays standard: 1 barrel = 42 gallons= ~159

litres (1 gallon =~3.8 litres) , is different than wine and whiskey barrels, which are 40 gallons each. The two
gallon difference was an allotment for evaporation and loss during its difficult voyage to the refinery.
Although regulations were eventually put in place to standardise quantities, it soon became clear that a
standard of quality was needed. Not ever oil formation produces the same quality of oil. Oil produced from one
formation may be physically and chemically difference than that of a different formation, the quality of oil
brought to the refineries will impact resulting finished products. The importance of this fact cannot be
understated. This will be fully explained in refining chapter.
The process of making kerosene yielded many byproducts which were considered waste products at firs, but
would later give birth to new industries. One such byproduct, now called gasoline, was too heavy, volatile, and
caused too much smoke when burned in a lamp. This made it unsuitable for the function of kerosene and
whale oil. Gasoline vapors have a tendency to explode under certain conditions within closed spaces. However,
these volatile properties made it the most ideal candidate to power the newly invented combustion engine used
by automobiles.
The gasoline-powered internal combustion engine was perfected by German inventor Nikolaus August Otto in
1867, this innovation helped solve the problem of what to do with the evergrwoing stockpile of hwat was then
considered a useless byproduct in the creation of kerosene.
Kerosene and gasoline combined to form a massive industry as these products became more popular. Despite
these developments, the oil refinement process still yielded a significant amount of waster products, including
what is known today as diesel. Diesel, unlike gasoline and kerosene, does not burn in an open container if fire
is applied directly to it. Without being compressed, diesel doest not have combustible properties at standard
pressure and temperature.
Growing stockpiles of untable byproducts were a problem in the beginning of the oil industry. These unusable
byproducts were known to be heavy, sludge-like substances that wee very burdensome to store or dispose of.
Something needed to be done. In 1892, Rudolph diesel invented an engine that was different than the gasoline
engine. It compressed an otherwise non volatile fluid that he isolated from these unusable crude oil byproducts, transforming it into a combustible fuel which now carries his name.
Diesel engines are more efficient than gasoline engines at converting chemical energy into mechanical energy.
This is just one reason why many heavy machines, such as farm equipment and our modern trucking industry,
run on diesel powered engines. The profitability of crude oil dramatically increased when expenses related to
storage and disposal were converted into sales of new commercial products like gasoline and diesel fuel. This
was double-win for the early industry.
It is amazing that human being tend to find creative ways to solve their problem with innovation. Throughout the
history of this industry, we found a way to take something that seemingly had no value to ceate tremendous
wealth, as seen in the stories of gasoline and diesel. Who would have predicted unwanted substances that
destroy the clothing of salt miners.
Could be refined to create new products that would transform our entire way of life in just over 150 years? This
trend continued in the decades that followed with an impressive variety of new technologies and consumer
products that were only made possible from crude oil.
Westernisation: 1865-1945
The story of the crude oil industry cannot possibly be told without mentioning one name :John d. Rockefeller.
His role in the industry helped created some of todays largest oil companies.
John Rockefeller got into the industry in 1865 with the purchase of an Ohio Oil refinery. He established the
Standard Oil company in 1870 and took control; of almost the entire oil industry by 1890. This gave him a
reputation as one of the most fearsome businessmen of this time. He was notorious for driving competitors out
of business if he could not simply buy their company. Rockefeller did this by dropping prices or undercutting
railroad oil transport costs in the areas he wished to dominate. An oil company not under rockefellers control
was known as an independent, a term which is till in use today.

The legacy of Standard Oil Still echoes today. Most people believe that the entire oil industry is concentrated in
handful of companies. In fact, there are thousands of small, local business dedicated to various stages of
production, transportation and refinement across the United States.
The First Mega-well
The Pennsylvania crude oil boom spread across the nation and the wotld. In 1901, Patilo Higgins hit our
countrys first mega-well, called Spindletop, located south of Beaumont, Texas. The well was so big that oil
jetted out into the sky when it was first tapped. This unprecedented display went on for 9 days before it was
reined in. until this discover, a typical oil well produced less than 50 barrels per day. Spindletop was gamer
changer, producing 50,000 barrels per day. It single-handedly took over the Us oil market overnight.
Along with the Spindeltop well in Texas, huge discoveries were being made around the world. In the 1870, the
Nobels, a family made famous by the invention of dynamite and establishment of the Nobel Peace Prize,
partnered with Rothchilds, a British banking family widely known to be associated with the World Bank today.
Together, they discovered the oil-rich area of Baku, Russia, near the Caspian Sea. In addition, a company
called Anglo-Dutch, otherwise known as Royal Dutch Shell or simply Shell, found oil deposits in modern day
Indonesia, near the island of Sumatra. This discovery became highly sought after by many nations in the Far
East as the benefits of oil were quickly becoming realised. Across the world, South America turned out to have
large oil reserves as well. In 1907, significant reserves were discovered in Venezuela, one of todays leading
producers. For reasons involving local politics, the actual production of oil didnt began until the early 1910s.
this production would become strategically vital in the decades to come. Lacking domestic oil resources, the
UK wanted to secure a reliable supply of crude oil. In 1908, the Empire established the entity known as the
Anglo-Persian Oil Company to explore its Middle Eastern colonies. Ever since this discovery, Middle East oil
has contributed to no small number of conflicts, power struggles, and tyranny. The Anglo-Perisan Oil Company
is known today as British Petroleum or BP, and it is still a significant player in todays industry. BPs swift and
comprehensive response to the tragic Deepwater Horizon spill in 2009 is a testament to its status as a Major.
The Role of Crude Oil Expands
These early mega-wells created an abundant supply of cheap fuel. In the true spirit of American invocation, it
did not take long before fantastic new inventions began to take flight.
In 1903, the Wright Borthers invented the Worlds first airplane. Their design employed a similar gasoline
engine to those being used in automobiles. Gasoline remained the primary fuel source for airplanes until after
the WWII era.
In 1908, henry ford perfected the assembly line manufacturing process. This allowed for the mass production of
Fords Model-T automobile, bringing one of the first affordable automobiles to the rapidly growing middle class
in America. The gasoline engine has since become an integral part of society.
Crude oil played a significant role in the WW1 Era. Winston Churchill, the commander of the British Royal
Navy, decided to replace coal-powered vessels with ships that ran on oil. This decision gave tremendeous
tactical advantage to what was then the worlds naval superpower. It so happens that many military and
commercial vessel continue to use residual oil from crude as their primary fuel source today.
By the end of WWI, the worlds major powers realised the strategic importance of reliable crude oil supplies. In
a 1924 speech, President Coolidge told the nation that , the supremacy of nations may be determined by the
possession of available petroleum and its products. This would prove to be prophetic.
WWII
By the 1930s, the Worlds major oil supplies came from only a few concentrated sources: the US, the Sovietcontrolled Caucases-caspian Sea region, the predominantly British controlled Middle East, and the Dutch East
Indies. Any observer of history should quickly notice that the bulk of these global oil resrouces were
consolidated within the allied powers as the war progressed.
The Allied powers made sure they would have secure access to their respective oil reserves, whether domestic
or colonial. At the same time, the major nations which formed the Axis alliance, Germany, Italy and Japan,

found themselves cut off from any notable supply of crude oil which would be needed to restore their great
empires. It didnt take long before the battled lines were drawn.
Germany had tuned to military aggression by the early 1930s in order to come out of the Great Depression. Its
invasion of France was made possible by the fearsome Panzer tank, with air support provided by the Luftwaffe.
The speed with which Hitlers audacious Blitzkrieg strategy ravaged the French countryside would not have
been possible without a continuous, reliable supply of gasoline and diesel fuel.
Shortly after, embargoed by the United States from access to oil and other resources from the Dutch East
indies in 1941, Japan decided to launch a surprise attack against Pearl Harbour with the hopes of crippling
Americas capacity to defend the well-established Indonesian oil supplies.
Crude oil was used by the machines of WW II in a wide variety of ways. For example, one curd eoil byproduct,
called toluene, was the primary component of TNT. Oil was also needed to make front-line runways and
synthetic rubber tires, to lubricate heavy machines guns and equipment and, of course, as a fuel source for
every type of military vehicle, from trucks and tanks to aircraft carriers and strategic bombers.
Throughout the course of the war, ensuring a supply of crude oil or denying one to the enemy was the basis
of many military actions on both the eastern and western fronts. The defeat of the Axis powers is widely
attributed to the following clauses: lack of available crude oil resources, incapacity to refine what crude oil they
could obtain into products like gasoline, and the inability to deliver such refined products to the tank and aircraft
on the frontlines. General carl A. Spaatz of the US Army Air Force summarised the cause of Germanys
imminent defeat in a historic telegram to his superiors.
Less than 500 tons of aviation were made during February, 1945, only 40 tons were made in March, none at
all in April Germanys large reserve of military aircraft stayed on the ground with empty tanks.Tanks and
armoured vehicles were moved to the front by oxen.
Postwar Period: jet powered Expansion
After WWII, in the spirit of the new-found peace, collaboration between former enemies allowed for
unprecedented new scientific breakthroughs, such as jet propulsion.
Frank Whittle of England and Hansvon Ohian of Germany independently invented the firs-generation jet
engine. The German ME-262 fighter was the first to successfully take flight in 1945. In peacetime, this
technology would give birth to the commercial air transportation industry that could eventually connect the
Americas with the rest of the world in a way that was never before seen.
The jet engine works by taking cold air in through an intake at its front, compressing the air with rows of
turbines, mixing compressed air with rows of turbines, mixing compressed air with fuel and igniting the fuel-air
mixture with an electrical spark within a combustion chamber. The ignited mixture is then expelled through a
rear-facing nozzle which creates thrust and propels the engine, and the plane its attached to, forward.
While the jet engine was bring perfected, most Americans had long since replaced kerosene lamps with the
electric bulb as a primary home-lighting source. Although it was possible for these early jet engines to run on
nearly any combustible fuel, kerosene was chosen as an ideal candidate due to its increased abundance.
There are many different types of jet fuel but, in general, it is made from kerosene.
Knowing about the historically pivotal role crude oil played during the 2 Great Wars is necessary to undertant
the industry as it stand today. This trend would continue throughout the rest of the 20thcentury. Many of the
global conflicts waged during the second half of the century were related to oil ins ome way or another.
Controlling Market Factors (Early industry-Present)
By 1890, John d. Rockefellers company, Standard Oil, had taken over nearly all aspects of the oil market. The
company grew so large, and was so powerful, that the Federal government has to intervene with an antitrust
lawsuit. In 1911, Standard Oil was forced to split into 34 separate companies, amny of which are still known
today.

Among the companies created by Standard Oils Split are the so-called Majors The Majors have transformed
significantly over time, mostly due to mergers and acquisitions. At one point, they were known as the Seven
Sisters. The Seven Sisters were particularly dominant after the Standard Oil split, and included.

Standard oil co. of new jersey

Standard Oil Co. of new York
Standard Oil of California
Texas Company
Royal Dutch Shell
Anglo-Persian oil company
Gulf Oil

Today, after many years of mergers and acquisitions, these companies are now known as The majors, or
even called the Supermajors. They are: Exxonmobil, Chevron, Royal Dutch Shell, BP and total SA. Even
combined, their dominance of the market today is not nearly as strong as it was during Rockefellers time.
The breakup of standard oil created a marketplace which was undesirable on many levels. A company that was
once operating comfortably for 60 years was suddenly forced, in effect, to compete with itself. The regulations
brought about by this antitrust action paved the way for rapid global expansion. No longer allowed to collude or
conspire as one, the Majors effectively fled the US.
Many of these companies ended up going overseas to find fewer governmental and evnirnomental restrictions,
resulting in a massive increase in development restrictions, resulting in a massive increase in development and
crude oil production. Surplus production (supplu) soon exceeded global demand, causing lower crude oil prices
and diminished profits for the major oil companies. At the same time, around 1928, Russia was recovering from
the first WW by bringing large amounts of oil to the market. The major oil companies were competing with each
other in such a way that they were cannibalizing themselves.
Before long, the Majors realised this competitive behaviour was unsustainable and that something needed to
be done. Many of their leaders met in Scotland to discuss these issues, which led to the As-Is Agreement. They
agreed to maintain their 1928 market share levels in order to ensure profit stability and to stop the selfcannibalisation that resulted from competition. Fearing the antitrust legislation that had split Standard Oil, the
agreement only applied to activities outside the united States.
The As-Is agreement was the first coordinated global attempted to control the oil market. Not since the days of
Rockefeller had the market seen such over manipulation and domination. An yet between 1911 and 1930,
control of the global oil market was difficult to maintain, despite all efforts to do so.
The participants of the As-Is agreement together made up a large portion of the oil industry at tis time, but did
not conrol quite enough of the global oil market to exert complete and thorough dominance. This allowed
independent operations to gain market share quickly by undercutting prices below the As-Is participants levels.
In addition, they had problems with cheating and enforcement, which were contributing factors in its failure.
This will be a familiar problem to future control efforts in later years.
In 1931, another mega-well was discovered by Dad Joiner in Eastern texas, This well was similar to gthe
game-changing Spindletop well discovered 30 years earlier. The well was so massive it quickly helped the US
dominate the global market by controlling the majority of the worlds spare oil supply. Around this time, prices
crashed nearly 90% on the oil market largely due to suplus.
The crisis of questionable control of the oil markets from 1911-1930 was occurring at a critical time in world
history. The Great Depression in the 1920s and 30s was crippling the economies of the US and many other
nations. People were looking to the Fedeal Government to solve societys problems. In an effort to bring order
to the chaotic oil industry, the Texas Railroad commission (TRC) and equivalent government agencies in other
states were asked to control production levels within their jurisdiction.
While not place directly in charge of the entire countrys oil production, the TRC had effective control over the
industry because Texas was the largest swing producing state. A swing producer is one that is operating at a

fraction of what is capable of. If need be, it can increased or decreased its level of production to stabilize prices.
To equate this concept to today market Saudi Arabia is considered by many in the general public to be the
worlds primary swing producer, although some have recently called this status into question.
As America crawled its way out of the Great Depression, jobs and infrastructure programs were created to get
the country working again. The discovery that bitumen, a crude oil byproduct, could be mixed with gravel to
form asphalt was found to be useful in the construction of cheap road. Before long, an interconnected highway
system was built, connecting cities and town together in a way that strengthened communication and defense,
and stimulated economic growth.
The modern American way of life started to take shape, largely powered by crude oil. Instead of living in cities
and town where all daily needs had to be within walking distance, the modern suburb became possible. People
could drive to work, the grocery store, or just for the fun of it. Another innocation at this time from plentiful oil
supplies was the American muscle car. The 1957 Chevrolet Corvette, for example, accelerated from 0-60 miles
per house (mph) in 5.7 seconds, and could reach speeds of up to 133 mph. Fuel company was not a concern,
this car only got about 11 miles to the gallon on its best day.
This boom period of economic expansion was experienced by those who still remembered the days of rationing
from the Great depression and WWII eras. Petrochemicals and plastic parts became increasingly popular as
replacements for metal components. Not only are plastics cheaper to produce, they are also lighter in weight,
revolutionizing nearly every industry.
With all these new consumer and industrial applications, the oil industry experienced unprecedented success.
The Texas Railroad commission had great influence over oil markets and the global economy due to its
authority over the apre oil production capacity of Texas. This dominance the value ofany given unit of oil.
During the TRCs control of the oil market, concession usually dictated overseas production. A concession was
a profit-sharing split (sually 50-50, minus costs) between an oil company and the country in which the oil was
located. As such , they were basic legal agreements between a country and a company or, in some cases, a
consortium of several companies producing oil within that country. Through these concession agreements, the
oil companies were able to fix the posted price of oil in a legally biding contract that had to be honoured for
many years, even decades in many cases.
Despite these concession that prmised 50% of the proceeds back to the host country, they heavily favoured the
oil companies in a number of different ways. Agreeing to a set purchase price for oil ahead of time, the oil
companies were able to cook the books by incurring extra costs such as broker fees, transportation, even
refining costs, thereby reducing the share of remaining profits give back to a host country.
Over a period of time, this perception of unfairness inspeired many of these oil-rich countries to form what
became known as the OPEC in 1960. The organisations foundin countries were iran, Iraq, Venezuela, Saudi
Arabia and Kuwait,. Based on the TRC model, OPEC controlled production by suing quotas to manipulate
global oil prices. Nowadays, member countries have their production quotas set in relation to the oil reserves of
each country. At first, OPEC did not have much influence in the industry. It wasnt until the early 1970s before
they started to gain control of the market.
In the late 1970s crude oil joined other commodities on the futures exchange market. This was seen as a fair
way to compensate anyone who produced oil, wherever that took place. Any producers, whether in the united
States or in the deep desserts of Saudi Arabia, was finally able to earn top dollar for their product by cutting out
the large profit margins that the Majors built into their posted price mechanism.
The best example of the future exchange market lies in the food sector. A wheat farmer and bread baker can
coordinate together on the futures exchange market and settle on a price for the farmers crop before he even
plants it based on the based on the bakers anticipated need of bread in the coming year. Once the price is
locked in on the contract, it is contingent on delivery in the future. This is why it is called afuture exchange, and
this is the marketplace in which oil is currently traded.
On todays open market, prices are more closely aligned to crude oil finished products, such as gasoline and
heating oil. In 1981, when these finished products started being openly traded on the New York Mercantile
Exchange (NYMEX) and an international market now known as the Intercontinental Exchange (ICE) based in

London, it soon became clear just how much profit the Majors were previously making with their posted price
mechanism. Once this discovery was made, pricing was thereafter derived from a basket of finished goods
that would be produced from each unit of oil in the future.
The oil market is truly a global activity. In addition to New York and London, there are major oil trading hubs in
los Angeles, the US Gulf Coast, Singapore, Dubai, and the Netheralnds. Generally, these locations have
physical oil moving through their ports. Price information about physical oil at these locations is called spot
pricing, and is often communicated to various trade journals, such as Platts in the case of NYMEX.
There are many factors which go into the pricing of oil, whether on a real-time spot market of a futures contract.
There are over 150 different blends being traded at any given time around the world, adding at great deal of
complexity to the oil market. The two most well-known blends are Brent North Sea and the West Texas
Intermediate (WTI), and are considered the benchmarks for the ICE and NYMEX markets, respectively. The
WTI blend, for example, is quoted on the financial news networks as simply light sweet crude because of its
low sulphur content and low density.
Crude oil is like no other substance ever found,. The story of how it was crept into our lives is unprecedented
and fascinating to say the least. Now that they industrys past has been explained, it becomes possible to
analyse todays marketplace along with possible future trends.