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International Oil Transportation

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Author: Dr. Jean-Paul Rodrigue

1. Petroleum
Very few commodities have become as vital as petroleum since it can be used as a source of energy as well as a raw material in the manufacturing of plastics and fertilizers. As a commodity of strategic importance, petroleum has for long been the object of geopolitical confrontations. Several contemporary geopolitical events were closely related to oil or had consequences on oil supply and prices. The first event that triggered the geopolitical importance of oil was the decision in 1912 by the British Admiralty to convert warships from coal to oil propulsion because of speed and range advantages. Since Britain had no oil resources, it nationalized the Anglo-Persian Oil Company and committed itself to the protection of this resource in Persia (Iran after 1934). World War I demonstrated the growing importance of the internal combustion engine (trucks, tanks and planes) on modern military operations. The 1920s were characterized by exploding civilian demand for oil because of motorization as the automobile was becoming a significant mode of transportation. A the same time, the industry quickly became controlled by a few major corporations that became the oil giants of today. The oligopolistic commercial control on the price and the production of oil was first established in 1928 by the Achnacarry Agreements between the "seven sisters", the major oil multinationals of the time. "Seven Sisters". The seven major oil multinationals which by the early 20th century have achieved dominance over the industry. Five of them were American and the two other were British. The American companies included Exxon (Standard Oil of New Jersey), Mobil (Standard Oil of New York) and Socal (Standard Oil of California which later became Chevron), all of which were the result of the forced breakup of Standard Oil in 1911, and Gulf and Texaco which were created after the discovery of the Spindletop field in Texas in 1901. The British companies were Royal Dutch Shell (a joint venture with the Netherlands) and British Petroleum (BP), whose interest in world oil expanded with the discovery of oil fields in Persia (Iraq) and in the Dutch East Indies (Indonesia). Through mergers and acquisitions the "Seven Sisters" have become four; ExxonMobil, Chevron-Texaco, BP (acquired Amoco and Arco) and Royal Dutch

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Iran. 25% of the ownership of oil operations in OPEC countries is nationalized. contributing to their defeat in 1945 by strategically more mobile allied forces. The Geopolitics of Petroleum In view of the powerful economic control of oil production by Western multinational corporations (the Seven Sisters).International Oil Transportation http://people. Iraq. Both Germany and Japan failed to establish a secure source of oil. The same year. 1973. as Europe and the United States were importing growing quantities of oil from that region. This situation however changed quickly.html Shell. The supply was shifting rapidly to this region as more oil reserves were discovered. and has planned fast operations to achieve these The main reasons were that production was very important in non-member countries and because of the difficulty of OPEC members to agree on a common policy since economic theory clearly underlines that cartels are bound to fail at fixing prices. especially in the Middle East and Latin America. especially the oil fields of Indonesia. They were effectively in control of the world's oil supply and demand with a set of strategies such as fixing quotas. Consequently. In such an environment of low petroleum prices and strong economic growth. World War II revealed to be a conflict strategically dominated by oil as key weapons were armored and air forces. the OPEC was unable to increase oil prices. would complicate access to oil resources. prices and production. Iran. However. had a goal to gather a greater share of the oil incomes by controlling supply. This cartelistic objective was feasible in the context of a growing market demand 2 of 10 10/13/2011 5:50 PM . Iraq and Saudi Arabia in alliances with Western powers. which accounted for the largest conventional oil field in the world. Venezuela. The post World War II era underlined the growing geopolitical importance of the Middle East. through expropriation. sowing the seeds of future oil supply control and shocks. Germany's invasion of the Soviet Union had among its major objectives the securing of the oil fields around Baku in the Caucasus region.hofstra. OPEC countries achieved control over more than 55% of the global oil supply and started to fix production quotas based on the oil reserves of each of its members. Another objective was to establish co-operation between producers in order to avoid competition that would bring the down the prices. Iraq. no developed country had an energy policy and energy waste was common. a figure that climbed to 51% by 1983. 1972. In 1948 the Ghawar Field was discovered in Saudi Arabia. Allied nations controlled about 86% of the world's oil supply. The American Government even predicted in the early 1970s that oil prices might rise to about 5 dollars per barrel by 1980. but a series of geopolitical events. of its entire oil industry undermining for a while its access to foreign markets but triggering sympathy in many developing countries as a symbol against foreign exploitation of national resources. Japan's strategic objectives were to secure the resources of Southeast Asia. Saudi Arabia and Kuwait founded the Organization of Petroleum Exporting Countries (OPEC) in 1960 at the Baghdad conference. In the 1970s. From its foundation until the beginning of 1970s. Each member began a process of nationalization of their oil industry (Libya. developed countries were confident that the price of petroleum would remain relatively stable. These corporations have invested massively in extraction infrastructures. 1975). In 1938 Mexico forcefully took control. Venezuela. 2. such as the creation of the OPEC and Islamic nationalisms. The decision of the United States to establish an oil embargo on Japan in 1941 is one event that triggered the war in the Pacific. Attempts were made to integrate countries like Iran. several producing countries. 1971. most of them in the Middle East. By 1972. a nationalization trend started to emerge in many developing countries.

as are other Southeast Asian countries. The Iranian revolution of 1979 and the ensuing Iran-Iraq War (1980-1988) caused the second oil shock where the price of oil surged over $35 per barrel. The market became controlled by supply (oil producers) causing the first oil shock. natural gas. reducing production by 25% and imposing export quotas. the share of OPEC dropped from 55% of all the petroleum exported in the 1970s to 42% in 2000. The dollar thus because entirely a fiat currency only backed up by the confidence in the American economy. The Kippur War between Israel and Egypt (and several other Arabian countries) in 1973 gave OPEC additional reasons to intervene by nationalizing production facilities. That year. in strategies for consuming less energy (such as energy efficient cars and appliances). but somewhat temporary. The goal was to undermine Israel's support. in relying more on national energy sources (petroleum. Mexico. surpassed Saudi Arabia in 1997 to become the second largest oil exporter to the United States.29 per barrel as OPEC countries adjusted their price to reflect the American inflationary monetary policy. Mexico. Vietnam is exploring offshore fields. is also the outcome of the uncertainties derived from the first and second oil shocks. in building strategic reserves. hydroelectricity.80 to $3. A decision was made to allocate quotas in proportion to proven oil reserves. nuclear energy). Japan and Germany. mainly by the United States. measures to lower oil consumption. Under the control of the OPEC. In 1971 the United States decided to "close the gold window" essentially removing the convertibility of the US dollar in gold. Strong inflationary pressures thus began. a fourfold increase. the price of oil remained high but stable from 1974 to 1978. The reserves of the United Arab Emirates were boosted from 3 of 10 10/13/2011 5:50 PM . On October 19 1973.html and the dependency on only a few oil suppliers. the United Kingdom and Colombia. around $12 per barrel. including oil. OPEC countries lost their price-fixing power because of internal problems (economic and geopolitical conflicts between its members) and especially with the arrival of new producers such as Russia. OPEC gained the temporary ability to control the price of oil.hofstra. divergences occurred within OPEC members to fix quotas and prices as competition increased. for instance. leaving doubts about their true extent. The price of oil consequently climbed to $12 per barrel by the end of 1973. the bulk of it in the United States. From 1982. with an all-time low of 30% in 1985. but very difficult to maintain in a competitive environment. which quickly percolated into commodity prices. Norway.International Oil Transportation http://people. These new producers were not submitted to OPEC policies and were free to fix their own prices. and in substituting petroleum for other energy sources when possible. Between 1970 and 1973. OPEC declared an oil embargo against the United States. coal. Furthermore. In a context of high oil demand. as the oil of the Persian Gulf was clearly perceived as of foremost importance to national security. For instance. This resulted in a relocation of energy-consuming industries. Oil became a geopolitical weapon. stating that the United States would intervene militarily if its oil supply was compromised. It is estimated that about 2 billion barrels are held in strategic reserves around the However. hopeful that there are major reserves under the South China Sea. oil prices jumped from $1. The Carter Doctrine (1980). as this event essentially became a "license to print". which lasted until June 1974. Saudi Arabia lowered its oil price to increase its market share while OPEC members were competing with each other to be allotted larger quotas. which lead to an array of "creative accounting" practices in the estimation of reserves. Kuwait's reserves surged from 64 to 92 billion barrels in just one year and without any new discoveries. imposing several drastic. the initial trigger of the surge in oil prices in the 1970s was a monetary event. Thus. Developed countries started to worry about the exhaustion of oil reserves and unreliable supply sources but not much was done on this regard. At the end of the 1980s and at the beginning of the 1990s. of limited additional capacity in developed countries and of no readily energetic substitutes. reserves were indexed to fit production needs. Latin American countries such as Columbia and Brazil are trying to boost their oil production. The military presence of the United States in the Middle East was increased.

and an average annual production around 3 billion tons in the 1990s. refining capacity and its distribution through a system of pipelines and tankers. 3. which ousted Iraqi forces of Kuwait. have stretched the world’s extra capacity thin. The result of this inflation of reserves and the larger export quotas they permitted was an oil counter-shock that lowered the barrel price under 20 dollars. which account for the fourth largest reserves on the world. saw the American occupation of Iraq. Since the first commercial exploitations in Pennsylvania in 1859. In 1920. control and in its functional and geographical concentration. which regulates about 37% of the global oil production. The market reacted to these uncertainties and the price of petroleum jumped to $23 per barrel. storage facilities. other petroleum-exporting countries were quick to expand their production to replace Iraq's and Kuwait's shortfalls and the price of oil fell to $15 per barrel by the end of the 1990s. political pressures. This number reached 500 million tons by 1950. The demand is controlled by a few very large multinational conglomerates. Then an oil embargo on Iraq was established by the United Nations. Unlike the first two oil shocks. Henceforth. geopolitical risk and monetary debasement. Iran announced that its real reserves were 93 billion barrels. Those inflated and possibly non-existent reserve figures remain today. petroleum reserves is subject to variations that are related to new 4 of 10 10/13/2011 5:50 PM . are also stretching global oil supplies. The United States applied the Carter Doctrine an intervened with a massive military operation. The most significant "increase" in oil reserves in 1985 came from Iraq when its reserves went to 100 billion barrels. each having a production and distribution system composed of refineries. Attempts at mitigating the consequences of an asset inflation phase triggered by accommodating credit creation policies have spilled over the commodity and energy sectors. Increased demands.hofstra. The outcome was a greater control of long term petroleum supply sources but with increasing political instabilities in the Middle East. has remained problematic. for the invasion of Kuwait by Iraq in 1990. triggering the First Gulf War (1990-1991). There are numerous challenges facing the global oil industry in terms of additional capacity. The beginning of the 21st century saw increased insecurities in oil supply. monetary debasement and military interventions. a third oil shock has unfolded between 2003 and 2008. The oil market was again a market controlled by the demand. distribution centers and at the end of the supply chain. the importance of oil increased significantly in the global economy. gas stations. This strong growth rests for a very large part on the availability of oil resources and their low cost.International Oil Transportation http://people. mainly from China which has become the world second largest importer.html 31 to 92 billion Like many other resources. 95 million tons of oil were produced annually around the world. Formal price fixing mechanisms. instability in Venezuela (corruption and nationalization) and Nigeria (civil unrest). even reaching a record low of 15 dollars in 1988. The Second Gulf War (2003). However. Oil output from Iraq. among others. The supply is controlled by a few countries where the oil industry is often nationalized or by the OPEC umbrella. In the current setting OPEC can be considered as a dysfunctional cartel likely bound to failure and be dismantled. The systematic debasement of the US dollar by the Federal Reserve is also contributing to higher oil prices through inflationary policies also followed by the European Central Bank. Additionally. OPEC countries only control about 40% of the global oil production. up from 47 billion barrels. up from previous figures of 47 billion barrels. the third oil shock was related to unhealthy mix of strained supplies. particularly if oil prices are high. both on the supply and demand sides. demand. under the pretense of fighting terrorism and securing weapons of mass destruction (which turned out to be non-existent). Petroleum Supply and Demand The oil industry is oligopolistic both in its supply. a billion tons in 1960. Abiding to production quotas became a major issue among OPEC members with countries such as Kuwait producing well above quota. This transgression was a motivation. commonly fail as there are too many incentives not to abide.

energy generation and transportation. in addition to an ongoing decline in several oil producing regions in the West. Economic systems. Continuous technological innovations in surveying and extraction enabled to discover and economically exploit oil resources in previously inaccessible locations. the control of OPEC will emerge again since the bulk of oil reserves is located within its jurisdiction. 90% of this excess oil production is located in the Persian Gulf with Saudi Arabia. the global oil production should peak around 2005-2010 and then start to decline. There is however a potential in tapping tar sands (particularly in Canada) to produce oil. which include industry. An overview of the geography of oil production and consumption thus underlines a strong spatial 5 of 10 10/13/2011 5:50 PM . Demand is also characterized by a level of seasonality with heating oil demands in the winter and more gasoline demands in the summer. North Sea). As of 2001. Oil reserves have a high level of concentration. nationalization in Venezuela and civil unrest in Nigeria. This notably involves artic and sub artic environmental conditions (e.International Oil Transportation http://people. which from being net exporters of oil have become net importers. An average of 83. excess oil production is limited both in capacity and in its geographical origin.hofstra. Supply.3 Mb/d). being the only major supplier able to provide instant additional capacity if required. This trend applies well to the United States. To this figure. have increased uncertainty for oil supplies. Demand. potentially dwindling supply and growing demand could create multiplying effects. Saudi Arabia alone has about 25% of all the world's oil reserves.800 billion barrels before oil began to be exploited in the 19th century. compared with 31. For many other cases oil consumption has not changed significantly over time.7 million barrels of petroleum per day were consumed (2006 figures). While the United States ranks as the leading global consumer of oil (20. Oil production has steadily increased in the second half of the 20th century to satisfy a growing demand. with 64% of proved reserves located in the Middle Thus.g. an estimated 1. This trend is being confirmed by the output of the world's largest oil fields. namely the conflict in Iraq. On average 81.1 Mb/d). along with accounting for the world's largest oil reserves.g. Excess production capacity is of high relevance as if a major disruption in other suppliers occurs.6 million barrels of crude oil are produced each day (2006 figures). housing. 32% of it in the Middle East. motorization is one of the driving forces behind the consumption of petroleum. with the United States being the most eloquent example. all which is either in decline or possibly declining. Figures about the totality of earth's oil reserves were between 2. Recent events. can be added between 200 to 900 billion barrels of oil that potentially remain to be found.5 Mb/d). Alaska and Siberia) or offshore locations (e. became dependant on cheap oil prices. the single most important oil producing region in the world.html discoveries and what can be economically extracted. putting upward pressures on energy prices.2 million barrels in 1965. but this process is energy intensive and leads to low quality fuels. The question remains about how much reserves of oil are available and how much time they would last. the rapid growth of the Chinese economy in the last decade has propelled China to the second rank of oil consumers (5. About 60% of all the oil being produced is already committed and 40% is sold on open markets. On a long-term perspective. surpassing Japan (5. the additional capacity can immediately be brought up to maintain the current oil supply level without significant price disruptions. There are also concerns that at the same time that global oil production could be leveling off and eventually decline that exports could drop at an higher rate because of growing consumption in oil producing countries. The relationships between oil supply and demand are characterized by: Reserves. China or Indonesia.100 and 2. China accounted for around 40% of the global growth in oil demand in the recent years. which represents about a third of all available oil reserves. Since 52% of all oil is consumed by transportation activities. More significantly. Considering these figures.020 billion barrels of proved oil reserves were available and 900 billion barrels have been extracted.

By 1866. which is roughly 62% of all the petroleum produced. The dominant modes of petroleum transportation are complimentary. Because of geographical and geological factors. pending the tanker's size and its specific the destination. the United States and Europe. For instance. Tanker ships can also be used as semi-permanent storage tanks. where oil is mainly produced is different from where oil is mainly consumed resulting in acute imbalances which are growing rapidly. As of 2005. Since the first oil tanker began shipping oil in 1878 in the Caspian Sea. as it is the case for the United States.86 billion tons. Petroleum Transportation The barrel is the standard unit of measure for oil production and transportation even if it no longer has much reference in reality (steel drums are sometimes used).500 tankers available on the international oil transportation market. Since then. The remaining 38% is either using pipelines (dominantly). International oil trade is often correlated with oil prices. OECD countries account for about 75% of global crude oil imports. Shorter journeys are generally serviced by smaller tanker ships 6 of 10 10/13/2011 5:50 PM . About 435 VLCCs account for a third of the oil being carried. Tankers bound to Japan are using the Strait of Malacca while tankers bound to Europe and the United States will either use the Suez Canal or the Cape of Good Hope. In the 1860s oil riggers were at a loss about where to store the oil suddenly gushing out of new rigs. The cost of hiring a tanker is known as the charter rate. About half the petroleum shipped is loaded in the Middle East and then shipped to Japan. international oil trade is a necessity to compensate the imbalances between supply and demand. tankers and storage facilities. The largest oil consumers are the most heavily industrialized countries such as the United States Western Europe and Japan. the volume of international trade in oil increased as a result of world economic growth. VLCCs are mainly used from the Middle East in high volumes (more than 2 million barrels per ship) and over long distances (Europe and Pacific Asia). notably when the origins or destinations are landlocked or when the distance can be reduced by the use of land routes.html differentiation between the supply and the demand. its origin. about 5% of the world's tanker capacity was being used for oil storage. The maritime circulation of petroleum follows a set of maritime routes between regions where it is been extracted and regions where it is been refined and consumed. although larger ships are preferred due to the economies of scale they confer. destination and the availability of ships. a standard barrel size of 42 US gallons (158. Different tanker size are used for different routes. a major portion of OPEC’s oil is traded in international markets. including pipelines. trains or trucks.98 liters) was agreed upon. The world tanker fleet capacity (excluding tankers owned or chartered on long-term basis for military use by governments) was about 280 million deadweight tons in 2002. namely for issues of distance and port access constraints. This can only be overcome by massive oil transportation infrastructures. about 2.4 billion tons of petroleum were shipped by maritime transportation. In 1990. 4. Barrels have always been a convenient mode in a pre-motorized era since they could handled by hand by rolling them. oil carried from the Middle East to the United States account for about 1 cent per liter at the pump. Since oil consumption and production do not happen in the same places. More than 100 million tons of oil are shipped each day by tankers. There is thus a specialization of maritime oil transportation in terms of ship size according to markets. Crude oil alone accounted for 1. Transportation costs thus account for about 5 to 10% of the added value of oil. Transportation costs account for a small percentage of the total cost of gasoline at the pump.hofstra. The growth in oil prices since 2000 makes the transport costs an even lower component of the total costs. Empty whiskey barrels were used as a palliative and a convenient mean to store and move oil for the emerging industry. It varies according to the size and characteristics of the tanker. Unlike most other the capacity of the world's maritime tanker fleet has grown substantially. There are roughly 3. Its usage has an unusual origin.International Oil Transportation http://people.

the great majority of Asian oil imports are coming from the Middle East. Monthly Nominal Spot Oil Price Nominal and Real Oil Price. 1977-2009 Estimated Oil Reserves. three quarters of American oil imports are coming from the Atlantic Basin (including Western Africa) with journeys of less than 20 days. 1980-1991 Share of OPEC and the Persian Gulf in the World Crude Oil Production. 1870-2009 (Dollars per Barrel) 7 of 10 10/13/2011 5:50 PM .html such as from Latin America (Venezuela and Mexico) to the United single-hulled tankers are gradually phased out to be replaced by double-hulled tankers. Selected OPEC Countries.International Oil Transportation http://people. 1960-2008 West Texas Intermediate.hofstra. For instance. Accordingly. Transport costs have a significant impact on market selection. In addition. due to environmental and security considerations. Related Topics The Strategic Space of International Transportation Maritime Transportation Transportation and Energy Commodity Chains and Freight Transportation Transportation and Commercial Geography Media OPEC Countries and Countries with Major Oil Reserves United States Strategic Petroleum Reserves. a 3 weeks journey with the halfway location of Singapore being one of the world's largest refining center.

1981-2006 Real Price of Oil and Major Disruptions in World Oil Supply.hofstra. 2001-2006 Peak Oil 8 of 10 10/13/2011 5:50 PM .edu/geotrans/eng/ch5en/appl5en/ch5a1en.International Oil Transportation http://people.html Reserves and Total Resources Types of Oil and Gas Reserves Cost of Finding Oil. 1950-2008 World Crude Oil Production World Oil Consumption The Global Oil Market Proven Oil Reserves Change in Major Crude Oil Reserves.

edu/geotrans/eng/ch5en/appl5en/ch5a1en. Consumption and Imports.hofstra. 1980-2007 World Oil Balance Modes Used for Petroleum Transportation Oil Transportation and Major Chokepoints.html World's Largest Oil Fields Oil Production of Some Declining Regions Export Land Theory Crude Oil Production and Consumption. 2005-6 Petroleum Production.International Oil Transportation http://people. China. United States Tanker Size Potential Impacts of High Oil Prices on Transportation 9 of 10 10/13/2011 5:50 PM .

edu/geotrans/eng/ch5en/appl5en/ch5a1en.html Major Oil Spills since 1967 Global Maritime Piracy. DO NOT COPY this web page for any reason outside personal or classroom uses. This material (including graphics) is not public domain and cannot be published. Jean-Paul Rodrigue. Dr. of Global Studies & Geography. in whole or in part. Dept. Permission MUST be requested and all uses of the material must be cited.hofstra. 2008-09 Home | Contents | Media | Glossary | Links | About | Contact | Purchase Copyright © 1998-2011.International Oil Transportation http://people. in ANY FORM (printed or electronic) and on ANY MEDIA without consent. Hofstra University. 10 of 10 10/13/2011 5:50 PM .