The Seven Ages of Oil Part 3 – Texas Oil Boom in the Gusher Age
This blog is part three of a series that explores the intricate history of oil.
1921-1973 – War, Depression, and the Long Boom
Prior to the unraveling of the European and American Pax imposed on the Middle East, the Texas cowboys would have their day. It is not unfair to say that the oil industry matured in Texas. Indeed, Texas, and specifically Houston, would grow to become the energy capital of the world. As the state grew in wealth, so did its stature and influence. The power and might of the United States, as well as its global aims, developed alongside the oil industry. In fact, the United States would later produce father and son US presidents who called Texas their home state and who would take the United States back into Iraq. Gradually, the Pax Britainica would succumb to Pax Americana until the falsely perpetrated Iraq War (a.k.a. the War on Terror).
In 1894, in Navarro County near Corsicana in East Texas, the American Well and Prospecting Company discovered oil by accident while looking for water. By 1898, the Corsicana oilfield was in production. The pivotal event, though, was the Spindletop strike in 1901. At that time, it was the world’s most productive well. Texas and the world were never the same again. The Wild West was quickly transformed, as the advent of Texas oil pushed the United States ahead of the Russian Empire as the world’s largest oil producer. The state came fully into its own by 1940 as the undeniable leader in the global oil economy – just in time for World War II.
Actually, oil prices rode out the Great Depression and WWII with considerably less drama than in any other period. That said, there was a momentary squeeze on oil in 1933 during the Great Depression. With growing Texas supply and a decline in prices, the price per barrel reached a low of around $12. Globally, other nations were upset with the United States, blaming them for overproduction and illegal production. Although there was not the monopolistic Standard Oil of old, the Standard Oil of post-1911 did exist within an oligarchic regime. Takeovers and acquisitions were rampant, locally and globally. It was a period of global unrest, and the Middle East was still in significant turmoil as they tried to throw off their western oppressors and establish independence.
The Shaw in Persia abruptly cancelled Britain’s prized Anglo-Persian oil concessions in November 1932. He rightly wanted a share of the profits to support building his country’s infrastructure. Although Britain toyed with the idea of war, a compromise was reached after the president of Anglo-Persia threatened to abandon the negotiations. Perhaps even more staggering was Saudi Arabia’s King Abdulaziz’ bargain basement sale of oil rights for an upfront payment of $250,000 by Standard Oil and a royalty of about $1.60 per barrel. The Middle East would never truly find its footing, fighting amongst each other over borders and rights, trying to manage the baffling effects of Pax.
But it was not only the Arabs who were feeling slighted. Germany also felt the weight of oppression. Found guilty alongside Austria-Hungary for World War I, the wrath of the victors imposed on them crippling financial sanctions and a disembodied empire. Germany was totally demilitarized. It was not enough that they were faced with insurmountable debt, but when the stock market collapsed on Wall Street on October 29, 1929, it sent financial markets worldwide into a tailspin with disastrous effects. With huge debt, American loans coming due, and the market for exports shrivelling, Germany was in desperate straits. With people out of work, banks failing, savings evaporated, and subsequent hyperinflation, the German people were cast into ruin. The Germans were not alone, and many people across the world turned to Fascism to save their economies. As history has shown, when times are tough and changes need to be made, societies go to war. It seemed that Hitler was the man for the job. He seized the opportunity, appealed to his disenfranchised countrymen, and built a massive armed force.
Much of the 1930s saw war and strife in Europe: the Spanish Civil War, the annexation of Austria, and the invasion of Czechoslovakia. However, it was the German invasion of Poland on September 1, 1939, that set the world to full-scale war once again. On September 3, Britain and France declared war on Germany but left their ally Poland to fall.
But of course, this is the story of oil. Germany’s heavy reliance on oil to power its immense war machine was identified before the conflict. The British RAF and American USAAF conducted a strategic bombing campaign to target facilities supplying oil – no target in any enemy country was spared. No oil, no war. At the close of World War II, with Hitler defeated and Japan staggering from two atomic blasts, three things were firmly established: he who controls the energy controls the world, an atomic age had been ushered in, and America was undoubtedly the world’s superpower.
Going back to Texas, despite the war raging on, by the 1940s, the Texas Railroad Commission had taken regulatory control of the Texas oil industry and managed to stabilize oil production thus eliminating most of the wild price swings that were common during the earlier years of the Texas boom. This basically meant that, from an oil standpoint, the United States entered the war in a composed state. Pivotally, the Great Depression led US President Franklin D. Roosevelt to develop the New Deal. The New Deal was a series of domestic programs enacted between 1933 and 1938 designed to extract the United States from depression through “relief, recovery, and reform.” He changed fiscal policy and reformed banking; but critically, he literally energized the nation by building massive electricity plants and put people to work building physical facilities as well as in the war effort.
The United States exited the war liberalized and empowered, entering a period of fabulous growth. It was the post-war golden age of capitalism that would end in crisis in the 1970s. This extended period of time was also called the “long boom.” Until 1973, the hegemonic control by the United States of most of the world’s oil continued largely unabated. Both the State and the major integrated oil companies were in charge. In July 1944, the Bretton Woods System was put in place to manage the financial relations amongst the first-world nations and established the gold standard, due to requirements to tie currency values to gold.
The United States was engaged in a cold war almost before World War II was over. The Cold War was largely bloodless, save for excursions into Korea and Vietnam starting from 1950. The Cold War served to bolster the US industrial complex and war machine. The armaments and nuclear bombs served as a deterrent to another World War, but came at a heavy economic cost. The benefits, though, were highly attractive. Being a central player in global markets gave the United States ultimate freedom in deployment and foreign relations. The United States was the go-to trade partner for all commodities. The United States intervened where it wanted, when it wanted, with virtual impunity. Pax Americana was at its height prior to the 1970s.
As previously mentioned, nothing lasts forever. The Bretton Woods system collapsed in 1971 when Nixon unilaterally severed the agreement, leaving the world to flounder. The Nixon shock sent the world into a tailspin and was to be followed soon by the OPEC shock. Nixon disconnected the link between the dollar and gold, making the US dollar a fully floating fiat currency. Nixon was prepared to print as much money as necessary to cover the costs of the Cold War. Still, he worried about the long-term strength of the US dollar. Brilliantly, recognizing the world was more hungry for oil now than ever (remember the cries of wolf about oil supply), he simply swapped gold for black gold. Recognizing that Saudi Arabia would love to have the United States as its ready market for oil, Nixon derived an agreement whereby Saudi oil could only be purchased in US dollars. Problem solved – everyone wanted US dollars. But let’s not celebrate too soon…
To find out what happens next, read the final chapter on the DataWatch emagazine site.
For more industry perspectives and the latest market data reports, subscribe to the monthly DataWatch emagazine here.https://blog.ze.com/our-industry-views/the-seven-ages-of-oil-part-3-texas-oil-boom-in-the-gusher-age/https://blog.ze.com/wp-content/uploads/2015/03/550x300blogImage2015_02_23B.jpghttps://blog.ze.com/wp-content/uploads/2015/03/550x300blogImage2015_02_23B-300x300.jpgIndustry ViewsAustria-Hungary,Bretton Woods,Britain,Cold War,Czechoslovakia,France,germany,Great Depression,Middle East,Nixon,oil industry,Pax,Persia,petroleum,Poland,Russia,Saudi Arabia,Spanish Civil War,Texas Railroad Commission,US,Vietnam,Wall Street,World War,WWIIThis blog is part three of a series that explores the intricate history of oil. 1921-1973 - War, Depression, and the Long Boom Prior to the unraveling of the European and American Pax imposed on the Middle East, the Texas cowboys would have their day. It is not unfair to say that...Aiman El-RamlyAiman El-Ramlyaiman@ze.comContributorBlogs by data management Experts & Analysts | ZE