The Outsourcing of America’s Oil Production
Oil is and has always been controversial. Different types of oil were used for lighting and heat for thousands of years. Long ago, Greek civilization rose on a sea of olive oil. They cooked with it, lit their lamps with it and paid for the expansion of their trade empire with it. Along the way different civilizations found other fuels. America’s rise as an economic power owed much to our ability to turn whales into oil, England’s industrial revolution was fueled by coal.
Today, however, we are obsessed with petroleum. Petroleum, oil from the ground, only gained value in the last two hundred years. A 2007 movie, “There Will Be Blood,” told the story of California oil pioneers a century ago. Since then America and oil, and later cars, all became welded together and moved forward into the American Century.
But halfway through the last century, just after World War II, something changed. Up until then, American oil was found, drilled, refined and sold in America. Sure, there was oil elsewhere in the world, but America had as much as we needed. But as the American car became part of the American dream, oil use exploded! At the end of the Civil War the US annually produced about 5 million barrels of oil, rising to 140 million by 1906, as the car began to become a significant consumer of oil. Today America produces 2,000 million barrels of oil domestically, plus we import ANOTHER 3,700 million barrels, often from the most dangerous places on earth. Domestic oil, our most reliable and native source of power, was now outsourced.
For years, this worked well, and we benefited from decades of cheap, inexpensive oil. And this arrangement worked well, until it didn't.
There is no question that America benefited from cheap, imported oil. It was a good deal for America, and the world. But as we have seen with all outsourcing, no one method of sourcing works forever. Technology, costs, labor… change over time. And we must always be ready to reassess how we use each resource. But oil was different. Never before had anything been outsourced that was this big, this complex and this global. We changed where we drilled the old, largely moving to the Middle east. We refined the petroleum into oil from foreign locations, with America’s largest oil refinery now ranking only 10th on the list of largest global refineries. Even the transportation of oil was itself outsourced, as a consequence of oil outsourcing. An oil company that only produces oil domestically faces an entirely different set of challenges than an oil company that needs to move oil around the world; managing global transportation issues requires specialists.
The outsourcing of America’s oil created many situations that require specialist knowledge. Negotiation for drilling rights or right of way to transport oil to the US required special knowledge, and often political connections. The trade for greater complexity and risk was the lower cost of oil. From 1946 to 1973, the cost of a barrel of oil, in inflation-adjusted dollars, remained the same… about $21-$22. In 1973, the Organization of Oil Producing (OPEC), at that time mostly Middle-Eastern producers, declared an embargo against America 1973. This was followed by the 1979 Iran Hostage crisis. By 1980, oil reached it’s all-time high of $104. Since then, prices have risen and fallen depending on political changes around the world. Each new global shock further complicated the oil industry, perhaps including political agreements with questionable governments, not just where the oil was but along the entire supply-line on the way back to the US.
Oil has become the world’s most complex experiment in outsourcing, but it still follows the basic rules of outsourcing that apply to everyday projects. Consider what we have learned over the past few decades:
Control: Outsourcing means giving up control. For oil, a lot of that control has been taken over by OPEC and other oil industry groups. We can ASK oil-producing nations to increase production, but we can’t tell them. If we want to increase our control over oil, we can do that but only by adding new costs or complexity. For example, America has made political alliances with oil nations, and even sold highly sophisticated other governments, in order to maintain favor from local rulers and ensure a flow of oil.
Complexity: An outsourcing solution adds additional steps and complexity. Getting oil from other parts of the world to the US is always a complex process. We now have supply lines stretching from the US to the other side of the world to get the oil we need. Every inch of that supply line must be safe in order to get the oil back home. In parts of the world, the rising cost of oil has increased the value of oil on a small tanker by so much that piracy on the high seas has returned. Because oil ships have become highly automated, and have very small crews, they are surprisingly vulnerable to attack by even a handful or armed pirates. Warlords, pirates, bandits, and the occasional outbreak of full-scale war are all just part of a day work keeping oil flowing to America.
Politics: Rebellions, changes in regimes, fundamentalist uprisings and just about every other kind of political and economic disruption has impacted the price of oil. As we look towards ever more distant locations for new oil, oil extraction creates new political and technological challenges.
Natural Disasters: Let’s not forget earthquakes, Tsunamis, tankers capsizing offshore, pipelines leaking in pristine forests, and every other form of disaster you can imagine. Global warming continues to add uncertainty to oil, since changing ocean conditions are altering the calculations that insurance companies make to determine the cost of insuring oil tankers.
Cost: All the factors above have changed dramatically since America began outsourcing oil. Partially, this is because the oil involves so much money, that even stable regions quickly develop new political complexities when oil money floods in. These costs, and others that have not yet been accounted for, have made cheap foreign oil far more expensive than we ever imagined. No other outsourcing project has lasted as long, so we shouldn't be surprised that so many questions about the global nature of oil are now in question. It’s time that we reassess our energy investments for the 21st century.
For the last couple of decades, we have been reminded of the risks and uncertainty of outsourcing so vital a resource as oil. Even more important than the cost of oil is the uncertainty of outsourced oil’s future. Alternative fuels and newer technology are making unstable global oil sources less and less desirable. As we look at all the costs of outsourced oil, America has begun to do an about-face and move towards a stronger domestic fuel policy. Is this the end of outsourced oil for America? It’s too soon to tell, but it is definitely the beginning of a shift in the energy economy, and a change in America’s global interests!
Today, however, we are obsessed with petroleum. Petroleum, oil from the ground, only gained value in the last two hundred years. A 2007 movie, “There Will Be Blood,” told the story of California oil pioneers a century ago. Since then America and oil, and later cars, all became welded together and moved forward into the American Century.
But halfway through the last century, just after World War II, something changed. Up until then, American oil was found, drilled, refined and sold in America. Sure, there was oil elsewhere in the world, but America had as much as we needed. But as the American car became part of the American dream, oil use exploded! At the end of the Civil War the US annually produced about 5 million barrels of oil, rising to 140 million by 1906, as the car began to become a significant consumer of oil. Today America produces 2,000 million barrels of oil domestically, plus we import ANOTHER 3,700 million barrels, often from the most dangerous places on earth. Domestic oil, our most reliable and native source of power, was now outsourced.
For years, this worked well, and we benefited from decades of cheap, inexpensive oil. And this arrangement worked well, until it didn't.
There is no question that America benefited from cheap, imported oil. It was a good deal for America, and the world. But as we have seen with all outsourcing, no one method of sourcing works forever. Technology, costs, labor… change over time. And we must always be ready to reassess how we use each resource. But oil was different. Never before had anything been outsourced that was this big, this complex and this global. We changed where we drilled the old, largely moving to the Middle east. We refined the petroleum into oil from foreign locations, with America’s largest oil refinery now ranking only 10th on the list of largest global refineries. Even the transportation of oil was itself outsourced, as a consequence of oil outsourcing. An oil company that only produces oil domestically faces an entirely different set of challenges than an oil company that needs to move oil around the world; managing global transportation issues requires specialists.
The outsourcing of America’s oil created many situations that require specialist knowledge. Negotiation for drilling rights or right of way to transport oil to the US required special knowledge, and often political connections. The trade for greater complexity and risk was the lower cost of oil. From 1946 to 1973, the cost of a barrel of oil, in inflation-adjusted dollars, remained the same… about $21-$22. In 1973, the Organization of Oil Producing (OPEC), at that time mostly Middle-Eastern producers, declared an embargo against America 1973. This was followed by the 1979 Iran Hostage crisis. By 1980, oil reached it’s all-time high of $104. Since then, prices have risen and fallen depending on political changes around the world. Each new global shock further complicated the oil industry, perhaps including political agreements with questionable governments, not just where the oil was but along the entire supply-line on the way back to the US.
Oil has become the world’s most complex experiment in outsourcing, but it still follows the basic rules of outsourcing that apply to everyday projects. Consider what we have learned over the past few decades:
Control: Outsourcing means giving up control. For oil, a lot of that control has been taken over by OPEC and other oil industry groups. We can ASK oil-producing nations to increase production, but we can’t tell them. If we want to increase our control over oil, we can do that but only by adding new costs or complexity. For example, America has made political alliances with oil nations, and even sold highly sophisticated other governments, in order to maintain favor from local rulers and ensure a flow of oil.
Complexity: An outsourcing solution adds additional steps and complexity. Getting oil from other parts of the world to the US is always a complex process. We now have supply lines stretching from the US to the other side of the world to get the oil we need. Every inch of that supply line must be safe in order to get the oil back home. In parts of the world, the rising cost of oil has increased the value of oil on a small tanker by so much that piracy on the high seas has returned. Because oil ships have become highly automated, and have very small crews, they are surprisingly vulnerable to attack by even a handful or armed pirates. Warlords, pirates, bandits, and the occasional outbreak of full-scale war are all just part of a day work keeping oil flowing to America.
Politics: Rebellions, changes in regimes, fundamentalist uprisings and just about every other kind of political and economic disruption has impacted the price of oil. As we look towards ever more distant locations for new oil, oil extraction creates new political and technological challenges.
Natural Disasters: Let’s not forget earthquakes, Tsunamis, tankers capsizing offshore, pipelines leaking in pristine forests, and every other form of disaster you can imagine. Global warming continues to add uncertainty to oil, since changing ocean conditions are altering the calculations that insurance companies make to determine the cost of insuring oil tankers.
Cost: All the factors above have changed dramatically since America began outsourcing oil. Partially, this is because the oil involves so much money, that even stable regions quickly develop new political complexities when oil money floods in. These costs, and others that have not yet been accounted for, have made cheap foreign oil far more expensive than we ever imagined. No other outsourcing project has lasted as long, so we shouldn't be surprised that so many questions about the global nature of oil are now in question. It’s time that we reassess our energy investments for the 21st century.
For the last couple of decades, we have been reminded of the risks and uncertainty of outsourcing so vital a resource as oil. Even more important than the cost of oil is the uncertainty of outsourced oil’s future. Alternative fuels and newer technology are making unstable global oil sources less and less desirable. As we look at all the costs of outsourced oil, America has begun to do an about-face and move towards a stronger domestic fuel policy. Is this the end of outsourced oil for America? It’s too soon to tell, but it is definitely the beginning of a shift in the energy economy, and a change in America’s global interests!