Energy, Security and the Remaking of the Modern World
PENGUIN BOOKS
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First published in the United States of America by The Penguin Press, a member of Penguin Group (USA) Inc. 2011
First published in Great Britain by Allen Lane 2011
This revised and updated edition published in Penguin Books 2012
Copyright © Daniel Yergin, 2011, 2012
Cover design: Wallzo
All rights reserved
ISBN: 978-1-84-614554-4
Maps and Charts
Introduction
Prologue
PART ONE
The New World of Oil
1. Russia Returns
2. The Caspian Derby
3. Across the Caspian
4. “Supermajors”
5. The Petro-State
6. Aggregate Disruption
7. War in Iraq
8. The Demand Shock
9. China’s Rise
10. China in the Fast Lane
PART TWO
Securing the Supply
11. Is the World Running Out of Oil?
12. Unconventional
13. The Security of Energy
14. Shifting Sands in the Persian Gulf
15. Gas on Water
16. The Natural Gas Revolution
PART THREE
The Electric Age
17. Alternating Currents
18. The Nuclear Cycle
19. Breaking the Bargain
20. The Urgency of Fuel Choice
PART FOUR
Climate and Carbon
21. Glacial Change
22. The Age of Discovery
23. The Road to Rio
24. Making a Market
25. On the Global Agenda
26. In Search of Consensus
PART FIVE
New Energies
27. Rebirth of Renewables
28. Science Experiment
29. Alchemy of Shining Light
30. Mystery of Wind
31. The Fifth Fuel—Efficiency
32. Closing the Conservation Gap
PART SIX
Road to the Future
33. Carbohydrate Man
34. Internal Fire
35. The Great Electric Car Experiment
Conclusion: “A Great Revolution”
Illustrations
Photo Credits
Bibliography
Notes
Acknowledgments
PENGUIN BOOKS
‘If there is one man whose opinion matters more than any other on global energy markets, it’s Daniel Yergin’ Time
‘It is impossible to think of a better introduction to the essentials of energy in the twenty-first century … the definitive guide to how we got here’ Ed Crook, Financial Times
‘If you were in any doubt about what makes the world go round, Daniel Yergin can enlighten you … a comprehensive picture of the nexus between power, politics and oil’ Sunday Times
‘Required reading … The Quest is a masterly piece of work and, as a comprehensive guide to the world’s great energy needs and dilemmas, it will be hard to beat’ Economist
‘Daniel Yergin is one of the planet’s foremost thinkers about energy and its implications’ Fortune
‘This fascinating saga is the definitive book on the most important of global issues, the quest for sustainable sources of energy. Dan Yergin, the pre-eminent energy expert of our times, weaves together security and environmental concerns to explain the system we have today and to analyze the sensible paths forward. This is one book you must read to understand the future of our economy and our way of life’ Walter Isaacson, author of Steve Jobs
‘The Quest, by Daniel Yergin, one of the world’s most experienced and influential authorities on global energy, may well become the definitive work on the science, history and economics of this most complex and important subject. This is a masterful and illuminating book on one of the most vital issues of our time’ Henry Kissinger
‘[A]n exploration of the energy industry and its history, touching down in so many remote corners of the globe, filled with such a huge cast of sinister business magnates, visionary scientists, political scoundrels and con men that it sometimes reads like a novel’ Los Angeles Times
‘In the magisterial style of his earlier global narrative of energy politics, The Prize, Daniel Yergin has again delivered a sweeping, authoritative, account of the science, economics and geopolitics of energy. His writing, as ever, is clear and intelligent, and his subject could hardly be timelier’ Steve Coll, author of Ghost Wars
‘Dan Yergin’s The Prize was a magisterial masterpiece. Now Yergin widens his lens and takes in not just oil but all energy sources. Anyone who wants to understand the economics or the politics of the twenty-first century should read this book’ Lawrence Summers, Charles W. Eliot University Professor at Harvard University and former United States Secretary of the Treasury
‘Daniel Yergin has masterfully connected the forces of economics and geopolitics with the complex science of energy production and climate change. The Quest provides a lucid guide through the forest of issues that stands between us and a sustainable energy future’ Susan Hockfield, President of Massachusetts Institute of Technology
‘This is a profound, unique, and brilliantly written book about some of the most important issues of our times’ Frederick W. Smith, Chairman and CEO of the FedEx Corporation
Daniel Yergin is one of the most highly respected and influential authorities in the world on energy, international politics and economics. He received the Pulitzer for The Prize, which became a number one bestseller and was made into an eight-hour PBS/BBC series seen by millions of people around the world. He is vice chairman of IHS and founder of IHS Cambridge Energy Research Associates, the leading research and consulting firm in its field, and serves as CNBC’s Global Energy Expert.
Caspian Sea and the Caucasus: The “Newly Independent States”
Pipeline Politics
Unconventionals: The New Geography of Oil and Gas
OPEC and the IEA: The Balancing Act
Choke Points for World Oil
The Gulf
North Field and South Pars: Qatar and Iran’s Offshore Gas Field
Europe’s Solar Potential
North America’s Solar Potential
The United States Wind Belt
Crude Oil Prices
U.S. Gasoline Prices
Auto Nations: U.S. and China
China’s Rise: GDP and Total Energy Demand
World Liquids Production 1946–2011
The Middle East Youth Bulge
The Fuel Mix
Keeling’s Curve: Atmospheric CO2 Levels
From Light to Electricity
Harnessing Wind Power
Global Onshore Wind Resources
Utility Scale Wind: Growing Up
The Gap
TO ANGELA, AND TO
ALEX AND REBECCA
They happened at the same time, halfway around the globe from each other. They both shook the world.
On March 11, 2011, at 2:46 in the afternoon Japan time, 17 miles below the seabed, the pressure between two vast tectonic plates created a massive violent upward force that set off one of the most powerful earthquakes ever recorded. In addition to widespread damage to buildings and infrastructure in the region north of Tokyo, the quake also knocked out the power supply, including that to the Fukushima Daiichi nuclear complex. Fifty minutes later, a huge tsunami unleashed by the quake swept over the coast, drowning twenty thousand people. At the nuclear complex, located at the very edge of the ocean, the massive tsunami surged high above the seawall and flooded the power station, including its backup diesel generators, depriving the hot nuclear reactors of the cooling water required to keep them under control. In the days that followed, explosions damaged the plants, radiation was released, and severe meltdowns of nuclear rods occurred.
The result was the worst nuclear accident since the explosion at the Chernobyl nuclear plant in Soviet Ukraine a quarter century earlier. The Fukushima accident, compounded by damage to other electric generating plants in the area, led to power shortages, forcing rolling blackouts that demonstrated the vulnerability of modern society to a sudden shortage of energy supply. The effects were not limited to one country. The loss of industrial production in Japan disrupted global supply chains, halting automobile and electronics production in North America and Europe, and hitting the global economy. The accident at Fukushima brought to an end what had been dubbed the global “nuclear renaissance”—which many had thought essential to help meet the power needs of a growing world—and replaced it with a “nuclear patchwork.”
On the other side of the world, a very different kind of crisis was unfolding—triggered a few months earlier not by the clash of tectonic plates, but by a young fruit seller in the Tunisian town of Sidi Bouzid. Frustrated by constant harassment by the town’s police and by the indifference of local officials, he doused himself with paint thinner and set himself aflame in protest in front of the city hall. His story and the ensuing demonstrations, transmitted by mobile phones, Internet, and satellite, whipped across Tunisia, the rest of North Africa, and the Middle East. In the face of swelling protests, the regime in Tunisia collapsed. And then, as protesters filled Tahrir Square in Cairo, so did the government in Egypt. Demonstrations against authoritarian governments spread across the entire region. In Libya, the protests turned into a civil war, which drew in NATO and brought down the regime.
The global oil price shot up in response not only to the loss of petroleum exports from Libya, but also to the disruption of the geostrategic balance that had underpinned the Middle East for decades. Anxiety mounted as to what the unrest might mean for the Persian Gulf, which supplies 35 percent of the oil sold into world markets, and for its customers around the globe.
These two very different but concurrent sets of events, oceans away from each other, delivered major shocks to global markets. So, a year later, did rising tensions over Iran’s nuclear program. The renewed uncertainty and insecurity about energy, and the anticipation of a deeper crisis, underscored a fundamental reality—how important energy is to the world.
This book seeks to explain that importance. It is the story of the quest for the energy on which we so completely rely, for the position and rewards that accrue from energy, and for the security it affords. It is about how the modern energy world developed, about how concerns about climate and carbon are changing it, and about how different the energy world may be tomorrow.
Three fundamental questions shape this narrative: Will enough energy be available to meet the needs of a growing world and at what cost and with what technologies? How can the security of the energy system on which the world depends be protected? What will be the impact of environmental concerns, especially climate change, on the future of energy?
As to the first, the fear of running out of energy has troubled people for a long time. One of the nineteenth century’s greatest scientists, William Thomson—better known as Lord Kelvin—warned in 1881 that Britain’s energy base was precarious and that disaster was impending. His fear was not about oil, but about coal, which had generated the “Age of Steam,” fueled Britain’s industrial preeminence, and made the words of “Rule, Britannia!” a reality in world power. Kelvin somberly warned that Britain’s days of greatness might be numbered because “the subterranean coal-stores of the world” were “becoming exhausted” and the day was drawing close when “so little of it is left.” The only hope he could offer was “that windmills or wind-motors in some form will again be in the ascendant.”
But in the years after Kelvin’s warning, the resource base of all hydrocarbons—coal, oil, and natural gas—continued to expand enormously.
Three quarters of a century after Kelvin’s address, the end of the “Fossil Fuel Age” was predicted by another formidable figure. Admiral Hyman Rickover, the “father of the nuclear navy” and, as much as any single person, the father of the nuclear power industry—and described once as “the greatest engineer of all time” by President Jimmy Carter.
“Today, coal, oil and natural gas supply 93 percent of the world’s energy,” Rickover declared in 1957. That was, he said, a “startling reversal” from just a century earlier, in 1850, when “fossil fuels supplied 5 percent of the world’s energy, and men and animals 94 percent.” This harnessing of energy was what made possible a standard of living far higher than that of the mid-nineteenth century. But Rickover’s central point was that fossil fuels would run out sometime after 2000—and most likely before 2050.
“Can we feel certain that when economically recoverable fossil fuels are gone science will have learned how to maintain a high standard of living on renewable energy sources?” the admiral asked. He was doubtful. He did not think that renewables—wind, sunlight, biomass—could ever get much above 15 percent of total energy. Nuclear power might well replace coal in power plants. But atomic-powered cars just were not in the cards. “It will be wise to face up to the possibility of the ultimate disappearance of automobiles,” he said. He put all of this in a strategic context: “High-energy consumption has always been a prerequisite of political power,” and he feared the perils that would come were that to change.
The resource endowment of the earth has turned out to be nowhere near as bleak as Rickover thought. Oil production today is five times greater than it was in 1957. Moreover, renewables have established a much more secure foundation than Rickover imagined. Yet we still live in what Rickover called the Fossil Fuel Age. Today, oil, coal, and natural gas provide over 80 percent of the world’s energy. Supplies may be much more abundant today than was ever imagined, but the challenge of assuring energy’s availability for the future is so much greater today than in Kelvin’s time, or even Rickover’s, owing to the simple arithmetic of scale. Will resources be adequate not only to fuel today’s $70 trillion global economy but also to fuel what might be a $130 trillion economy in just two decades? To put it simply, will the oil resources be sufficient to go from a world of almost a billion cars to a world of more than two billion?
The very fact that this question is asked reflects something new—the “globalization of energy demand.” Billions of people are becoming part of the global economy; and as they do so, their incomes and their use of energy go up. Currently, oil use in the developed world averages 14 barrels per person per year. In the developing world, it is only 3 barrels per person. How will the world cope when billions of people go from 3 barrels to 6 barrels per person?
The second theme of this book—security—arises from risk and vulnerability: the threat of interruption and crisis. Since World War II, many crises have disrupted energy supplies, usually unexpectedly.
Where will the next crisis come from? It could arise from what has been called the “bad new world” of cyber vulnerability. The complex systems that produce and deliver energy are among the most critical of all the “critical infrastructures,” and that makes their digital controls tempting targets for cyberattacks. Shutting down the electric power system could do more than cause blackouts; it could immobilize society. When it comes to the security of energy supplies, the analysis always seems to return to the Persian Gulf region, which holds 55 percent of conventional oil reserves. Iran’s nuclear program could upset the balance of power in that region. Terrorist networks have targeted the region’s vast energy infrastructure to try to bring down existing governments, drive up the price of oil, and “bankrupt” the West. The region also confronts the turmoil arising from the dissatisfaction of a huge bulge of young people for whom education and employment opportunities are lacking and whose expectations are far from being met.
There are other kinds of risks and dangers. It is an imperative to anticipate them, prepare for them, and ensure the resilience to respond—so as not to have to conclude after the fact, in the stark words of a Japanese government report on the Fukushima disaster, that “consistent preparation” was “insufficient.”
In terms of the environment, the third theme, enormous strides have been made to address traditional pollution concerns. But when people in earlier decades focused on pollutants coming out of the tailpipe, they were thinking about smog, not about CO2 and global warming. In this century climate change has become a dominant political issue and central to the future of energy. This shift has turned greenhouse gases into a potent rationale for rolling back the supremacy of hydrocarbons and expanding renewables.
Yet most forecasts show that much of what will be the much larger energy needs two decades from now—75 to 80 percent—are currently on track to be met as they are today, from oil, gas, and coal, although used more efficiently. Or could the world shift toward what Lord Kelvin thought was needed and Admiral Rickover doubted was possible—a new age of energy, a radically different mix that relies much more heavily on renewables and alternatives, perhaps even from sources that we cannot identify today? What kind of energy mix will meet the world’s energy needs without crisis and confrontation?
Whatever the answers, innovation will be critical. Today, the emphasis on innovation across the energy spectrum is greater than ever before. That increases the likelihood of benefitting from what General Georges Doriot, the founder of venture-capital investing, called “applied science” being successfully applied to energy.
The lead times may be long owing to the scale and complexity of the vast system that supplies energy, but if this is to be an era of energy transition, then the $6 trillion global energy market is “contestable.” That is, it is up for grabs among the incumbents—the oil, gas, and coal that supply the bulk of today’s energy—and the new entrants—such as wind, solar, and biofuels— that want to capture a growing share of those dollars. A transition on this scale, if it does happen, has great significance for emissions, for the wider economy, for geopolitics, and for the position of nations.
The first section of this book describes the new, more complex world of oil that has emerged in the decades since the 1991 Gulf War. The essential drama of oil—the struggle for access, the battle for control, the geopolitics that shape it—will continue to be a decisive factor for our changing world. China, which two decades ago hardly figured in the global energy equation, is central to this new world. This is true not only because it is the manufacturing “workshop of the world,” but also because of the “build-out of China”—the massive national construction project that is accommodating the 20 million people who are moving each year from rural areas into cities.
Part II centers on energy security and the future of supply. Will the world “run out” of oil? If not, where will it come from? The new supply will include natural gas, with its growing importance for the global economy. The rapid expansion of liquefied natural gas is creating another global energy market. Shale gas, the biggest energy innovation since the start of the new century, has turned what was an imminent shortage in the United States into what may be a hundred-year supply and may do the same elsewhere in the world. It is dramatically changing the competitive positions for everything from nuclear energy to wind power. It has also stoked a new environmental debate.
Part III is about the age of electricity. Ever since Thomas Edison fired up his power station in Lower Manhattan, the world has become progressively more electrified. In the developed world, electricity is taken for granted and yet the world cannot operate without it. For developing countries, shortages of electricity take their toll on people’s lives and on economic growth.
Today, a host of new devices and gadgets that did not exist three decades ago—from personal computers and DVD players to smart phones and tablets— all require increasing supplies of electricity—what might be called “gadgiwatts.” Meeting future electricity needs means challenging and sometimes wrenching decisions about the choice of fuel required to keep the lights on and power flowing.
Part IV tells the little-known story of how climate change, a subject of interest to a handful of scientists, became one of the dominating questions for the future. The study of climate began in the Alps in the 1770s out of sheer curiosity. In the nineteenth century, some scientists began to think systematically about climate, but not because they were worried about global warming. Rather, they feared the return of an ice age. Only in the late 1950s and 1960s did a few researchers begin to calculate rising levels of carbon in the atmosphere and calibrate what that might mean for rising temperatures. The risk, they concluded, was not global cooling but global warming. But it was only in the twenty-first century that climate change became a major political issue.
Part V describes the new energies—the “rebirth of renewables”—and the evolution of technology. The story of the renewable industries is one of innovation, entrepreneurial daring, political battles, controversy, disappointment and despair, recovery and luck. They have become large global industries in themselves, but they are also reaching a testing point to demonstrate whether they can attain large-scale commerciality.
There is one key energy source that most people do not think of as an energy source—the “fifth fuel.” Sometimes it is called conservation; sometimes efficiency. It is hard to conceptualize and hard to mobilize and yet it can make the biggest contribution of all to the energy balance in the years immediately ahead.
The themes converge in Part VI on transportation and the automobile. It had seemed absolutely clear that the race for the automobile was decided almost exactly a century ago, with an overwhelming victory by the internal-combustion engine. But the return of the electric car—now fueled not only by its battery but also by government policies—is restarting the race. If the electric car proves itself competitive, at least in some circumstances, that outcome will reshape the energy world. That is not the only competitor. The race is also on to develop biofuels—to “grow” oil, rather than drill for it— and to use natural gas as a motor fuel. All this sets a very big question: Can petroleum be deposed as king of the realm of transportation?
Together these sections provide a panorama of global energy. But readers need not read them sequentially, as each section stands on its own and tells its own related but distinctive story.
We can be sure that, in the years ahead, new “surprises” will upset whatever is the current consensus, change perspectives, redirect both policy and investment, and affect international relations. These surprises may be shocks of one kind or another—from political upheavals, wars or terrorism, or abrupt changes in the economy. Or they could be the result of accidents or of nature’s fury. Or they could result from unanticipated technological breakthroughs.
But of one thing we can be pretty certain: The world’s appetite for energy in the years ahead will grow enormously. The absolute numbers are staggering. Whatever the mix in the years ahead, energy and its challenges will be defining for our future.
Iraqi troops and tanks had been massing ominously for several days in late July 1990 on the border with Kuwait. But Saddam Hussein, Iraq’s dictator, assured various Middle Eastern leaders that they need not worry, that his intentions were peaceful, and that matters would get settled. “Nothing will happen,” he said to Jordan’s king. He told Egypt’s president that he had no intention of invading Kuwait. To the U.S. ambassador, summoned on short notice, he raged that Kuwait, along with the United Arab Emirates, was waging “economic warfare” against Iraq. They were producing too much oil and, thus, driving down the price of oil, said Hussein—the results for Iraq, he added, were unbearable, and Iraq would have to “respond.” The U.S. ambassador, citing Iraqi troop movements, asked “the simple question—what are your intentions?” Hussein said that he was pursuing a diplomatic resolution. The ambassador replied that the United States would “never excuse settlement of disputes by other than peaceful means.” At the end of the meeting, Saddam told the ambassador that she should go on vacation and not to worry.1
However, a week later, in the early morning hours of August 2, 1990, Iraqi forces moved across the border and proceeded, with great brutality, to seize control of Kuwait. The result would be the first crisis of the post–Cold War world. It would also open a new era for world oil supplies.
Iraq proffered many rationales for the invasion. Whatever the justifications, the objective was clear: Saddam Hussein intended to annex Kuwait and remove it from the map. An Iraq that subsumed Kuwait would rival Saudi Arabia as an oil power, with far-reaching impact for the rest of the world.
In the morning on August 2, Washington, D.C., time, President George H. W. Bush met with his National Security Council in the Cabinet Room at the White House. The mood was grim. The peace and stability so many around the world had hoped for were now suddenly and unexpectedly threatened. Just eight months earlier, the Berlin Wall had fallen, signaling the end of the Cold War. The key nations still had their hands full trying to peacefully wind down that four-and-a-half-decade confrontation.
With the annexation of Kuwait, Iraq would be in a position to assert its sway over the Persian Gulf, which at the time held two thirds of the world’s reserves. Saddam already had the fourth-largest army, in number of soldiers, in the world. Now Iraq would also be an oil superpower. Saddam would use the combined oil reserves, and the revenues that would flow from them, to acquire formidable arsenals, including nuclear and chemical weapons; and, with this new strength, Iraq could project its influence and power far beyond the Persian Gulf. In short, with this invasion and annexation, Iraq could rewrite the calculations of world politics. Allowing that to happen would run counter to four decades of U.S. policy, going back to President Harry Truman, aimed at maintaining the security of the Persian Gulf.
The discussion in the Cabinet Room on August 2, perhaps reflecting the initial shock, was unformed and unfocused. Much of it turned toward various forms of economic sanctions, almost as though adjusting to a new reality. Or at least it seemed that way to some in the room, including President Bush himself, who was “appalled,” as he put it, at the “huge gap between those who saw what was happening as the major crisis of our time and those who treated it as the crisis du jour.”
“We will have to get used to a Kuwait-less world,” said one adviser, acknowledging what seemed to be a fait accompli.
Bush raised up his hand.
“Not so fast,” he said.2
Thereafter unfolded an extraordinary enterprise in coalition building—with some 36 nations signing on, in the form of either troops or money, under the auspices of the United Nations. The coalition included Saudi Arabia, whose largest oil field was only 250 miles from its border with Kuwait and whose ruler, King Fahd, told Bush that Saddam was “conceited and crazy” and that “he is following Hitler in creating world problems.” It also included the Soviet Union, whose president, Mikhail Gorbachev, said something that would have been unthinkable only a couple of years earlier—that the Soviet Union would stand “shoulder to shoulder” with the United States in the crisis.3
Over the six months that followed, a coalition force steadily and methodically assembled in northern Saudi Arabia until it numbered almost a million strong. In the very early predawn hours of January 17, 1991, Operation Desert Storm commenced its first phase, with aerial bombardment of Iraqi military targets. On January 23, the Iraqis opened the valves on Kuwait’s Sea Island Oil Terminal, releasing upwards of six million barrels of oil into the Persian Gulf, the largest oil spill in history, in an effort to foil what they expected to be an offensive from the sea by U.S. Marines. A month later, on February 23, coalition forces liberated Kuwait City. The next day, the coalition forces swept north from Saudi Arabia into Iraq, throwing back the Iraqi army. The invasion from the sea turned out to be a feint. The actual ground war took no more than a hundred hours, and it ended with Iraqi forces in full retreat.
But if Hussein could not have Kuwait, he would try to destroy it. Hussein’s soldiers left Kuwait burning. Almost eight hundred oil wells were set aflame, with temperatures as high as three thousand degrees, creating a hellish mixture of fire and darkness and choking smoke and gross environmental damage. As much as six million barrels of oil a day were going up in flames— much more than Kuwait’s normal daily production and considerably more than Japan’s daily oil imports. The scale of this inferno was so much bigger than anything that even the most experienced oil-well fire-fighting firms had ever seen, and a host of new techniques had to be quickly developed. The last of the fires was not put out until November 1991.
In the aftermath of the war, Saddam was boxed in; it seemed only a matter of time before the Iraqi dictator, weakened and humiliated, would be toppled by internal opponents.
The outcome of the First Gulf War was a landmark for what was expected to be a more peaceful era—what, for a time, was called a new world order. The Soviet Union was no longer an adversary of the West. At the end of 1991, the Soviet Union disintegrated altogether. The talk was now of a new “unipolar world” in which the United States would be not only the “indispensable nation” but also the world’s only superpower.
A new age of globalization followed: economies became more integrated and nations, more interconnected. “Privatization” and “deregulation,” which had begun in the 1970s and gained momentum in the 1980s, became the watchwords around the world. Governments were progressively giving up the “commanding heights”—that is, control of the strategic sectors of their economies. Nations instead put increasing confidence in markets, private initiative, and global capital flows.
In 1991 India began the first phase of reforms that would unshackle its economy and eventually turn it into a high-growth nation and an increasingly important part of the global economy.
In the energy sectors of countries, as in so many other sectors, traditional government ministries were turned into state-owned companies, which in turn were partly or entirely privatized. Now many of these ministries-turned-companies worried as much about what pension funds and other shareholders thought as about the plans of government civil servants.
International barriers of all kinds came down. With the Iron Curtain gone, Europe was no longer divided between East and West. The European Community turned into a much more integrated European Union and established the principle of the euro as its currency. A series of major initiatives—notably, the North American Free Trade Agreement—promoted freer trade. Overall, global trade grew faster than the global economy itself. Developing nations morphed into emerging markets and became the fastest-growing countries. Their rising incomes meant growing demand for oil.
Technology also drove globalization—in particular, the rapid development of information technology, the rise of the Internet, and the dramatic fall in the costs of international communications. This was changing the way firms operated, and it was connecting people in ways that had been inconceivable just a decade earlier. The “global village,” a speculative concept in the 1960s, was now quickly becoming a reality. The oil and gas industry was caught up in these revolutions. Geopolitical change and greater confidence in markets opened new areas to investment and exploration. The industry expanded its capacity to find and produce resources in more challenging environments. It seemed now that an age of inexpensive oil and natural gas would extend much further into the future. That would be good news for energy supply. But not such good news for higher-priced alternatives.
The energy crises of the 1970s had combined with rising environmental consciousness to give birth to a range of new energy options, known first as “alternative energy” and then, more lastingly, as “renewables.” They covered a wide range—wind, solar, biomass, geothermal, etc. What gave them a common definition was that they were based neither on fossil fuels nor on nuclear power.
They had emerged out of the tumult of the 1970s with a great deal of enthusiasm—“rays of hope” in a famous formulation. But over the 1980s, the hopes had been dulled by the realities of falling costs of conventional energy, their own challenging economics, technological immaturity, and disappointment in deployment. With moderate oil prices and the apparent restoration of energy stability in the early 1990s, the prospects for renewable energy became even more challenging.
Yet environmental consciousness was becoming more pervasive. Most environmental issues were, traditionally, local or regional. But there was growing attention to a new kind of environmental issue, a global issue: climate change and global warming. Attention was initially confined to a relatively small segment of people. That would change in due course, with profound implications for the energy industry—conventional, renewable, and alternative.
In other ways, the combination of energy policies launched in the 1970s and the dynamics of the marketplace had worked. In the face of much skepticism, energy efficiency—conservation—had turned out to be a much more vigorous contributor to the energy mix than most had anticipated.
Mideast politics, which so often bedeviled security of supply, was no longer a threat. In the decade that followed the Gulf crisis, it seemed that the Middle East was more stable and that oil crises and disruptions were things of the past. No longer was there a Soviet Union to meddle in regional politics, and the outcome of the Gulf crisis and the weight of the United States in world affairs looked like an almost sure guarantee of stability.
The Palestinian Liberation Organization realized that it had driven itself into a dead end by supporting Saddam in the Gulf crisis, and, in the process, alienating many of the Arab countries that were its financial benefactors. It quickly reoriented itself, and swift progress thereupon followed in the Israeli-Palestinian peace process. In Washington, D.C., in September 1993, Yasser Arafat, chairman of the Palestinian National Authority, and Israel’s prime minister, Yitzhak Rabin, signed the Oslo Accords, which laid out the route to a two-state solution to that long conflict. And then, standing in front of President Clinton with the White House as a backdrop, they did what would have seemed inconceivable three years earlier—shook hands. The following year, they shared the Nobel Peace Prize along with Israel’s foreign minister, Shimon Peres. All this was a positive and powerful indicator of the world that seemed to be ahead. It might not have happened had Saddam not gone to war.
As for Saddam Hussein himself, he no longer seemed to be going anywhere.
In 1991 the coalition’s forces had stopped 90 miles short of Baghdad. The coalition had come together under the authority of the United Nations to eject Saddam from Kuwait; it had no mandate to remove Saddam and change the regime. Nor was there any desire to engage in the potentially bloody urban warfare that would be required for a final push. As it was, the television images of the destruction of the Iraqi army, and the backlash those images were engendering, were in themselves a further reason to call things to a halt—what has been dubbed the “CNN effect.” Beyond all that, it was widely assumed that aggrieved elements of the Iraqi military would do what was expected—launch a coup—and that Saddam’s days were numbered. But, such was his ruthlessness and iron control, that, contrary to expectations, he held tightly to power after the war.
Yet Saddam’s position was much reduced. For Iraq was now hemmed in by a program of inspections, military force, and sanctions that amounted to what has been called “classic containment,” evoking the policy that had checked Soviet expansion during the Cold War. In addition, some efforts were mounted over the next few years to support Saddam’s opponents in toppling him, but that all ended in failure. Under the administration of Bill Clinton, the containment policy became conjoined with what now was described as “dual containment”—of Iran along with Iraq.
In principle, U.N. weapons inspectors could range freely around Iraq, looking for the elements that could go into weapons of mass destruction— colloquially known as WMD. In practice, obstructions were constantly put in the inspectors’ way. There was only one moment of surprising cooperation: In 1995 the head of Iraq’s unconventional weapons program, who happened to be Saddam’s son-in-law, defected to Jordan. The regime panicked, fearing what he might tell. Trying to preempt any revelations, Baghdad suddenly released half a million documents (which had been hidden in a chicken coop) that detailed production of a variety of biological weapons. But after Saddam lured his son-in-law back to Iraq (in order to have him killed), obstruction once again returned as the norm.4
Still, the days of Saddam’s capacity to try to control world oil had passed. In 1995 the United Nations established the Oil-for-Food Programme, which allowed Iraq to sell a defined amount of oil. Half of the revenues went for essentials, like medicine and food. Before Saddam seized power, Iraq had been an exporter of food to Europe and even shipped dates to the United States. But, under Saddam, agriculture had suffered, and oil exports provided the funding to import the food the country now required. The other half went to reparations and to fund the U.N. inspections. In addition, Saddam’s regime benefitted from billions of dollars of secret kickbacks from those who had been granted contracts to sell Iraqi oil, ranging from mysterious Russian middlemen to a Texas oil tycoon to officials from countries seen as friendly to Iraq.5
But the program always seemed at risk. Would Saddam continue to cooperate with the U.N. program this time? Or would he break off cooperation, reducing or cutting off altogether Iraqi exports—thus abruptly sending the price up? The uncertainty created considerable price volatility.
By the end of the 1990s, the U.S. policy of containment was clearly fraying. Sentiment was growing in the Middle East and Europe that the sanctions were hurting not Saddam and his clique, and the Republican Guard that kept them in power, but the general Iraqi population. In 1998 Saddam permanently expelled the U.N. weapons inspectors. A 1998 U.S. National Intelligence Estimate concluded that Saddam’s ambitions for weapons of mass destruction were unchecked.6
Yet Saddam had been contained, and it appeared that he would never again be able to renew his bid to control the Persian Gulf. Next door in Iran, in 1997, Mohammad Khatami, regarded as a reformer and a relative moderate, was elected president, and there seemed a possibility to reduce the mutual hostility that had so dominated relations between Washington and Tehran. With all these changes, Middle East petroleum now appeared much more secure—and that meant that the world’s oil supply was more secure. Given this stability, it was thought that the price would circle around $20 or so a barrel. For American motorists, that meant relatively low gasoline prices, which they assumed were part of the natural order.
At the same time, technology was increasing the security of oil supplies in a different way—by expanding the range of the drill bit and increasing recoverable reserves. The petroleum industry was going through a period of innovation, capitalizing on the advances in communications, computers, and information technology to find resources and develop them, whether on land or farther and farther out into the sea.
So often, over the history of the oil industry, it is said that technology has gone about as far as it can and that the “end of the road” for the oil industry is in sight. And then, new innovations dramatically expand capabilities. This pattern would be repeated again and again.
The rapid advances in microprocessing made possible the analysis of vastly more data, enabling geophysicists to greatly improve their interpretation of underground structures and thus improve exploration success. Enhanced computing power meant that the seismic mapping of the underground structures—the strata, the faults, the cap rocks, the traps—could now be done in three dimensions, rather than two. This 3-D seismic mapping, though far from infallible, enabled explorationists to much improve their understanding of the geology deep underground.
The second advance was the advent of horizontal drilling. Instead of the traditional vertical well that went straight down, wells could now be drilled vertically for the first few thousand feet and then driven at an angle or even sideways with drilling progress tightly controlled and measured every few feet with very sophisticated tools. This meant that much more of the reservoir could be accessed, thus increasing production.
The third breakthrough was the development of software and computer visualization that was becoming standard throughout the construction and engineering industries. Applied to the oil industry, this CAD/CAM (computer-aided design, computer-aided manufacturing) technology enabled a billion-dollar offshore production platform to be designed down to the tiniest detail on a computer screen, and its resilience and efficiency tested in multiple ways, even before welding began on the first piece of steel.
As the 1990s progressed, the spread of information and communications technology and the extraordinary fall in communication costs meant that geoscientists could work as virtual teams in different parts of the world. Experience and learning from a field in one part of the world could instantly be shared with those trying to solve similar problems in other parts of the world. As a result, the CEO of one company said at the time with only some exaggeration, scientists and engineers “would go up the learning curve only once.”
These and other technological advances meant that companies could do things that had only recently been unattainable—whether in terms of identifying new prospects, tackling fields that could not be developed before, taking on much more complex projects, recovering more oil, or opening up entirely new production provinces.
Altogether, technology widened the horizons of world oil, bringing on large amounts of new supplies that supported economic growth and expanded mobility around the world. Billions of barrels of oil that could not have been accessed or produced a decade earlier were now within reach. All that proved to be “just in time” technological progress. For the world appeared to be on a fast track in terms of economic growth—and, thus, in its need for more oil.
The world was also changing fast in terms of geopolitics. Countries that had been closed or restrictive toward investment by international companies were now opening up, inviting the companies to bring their skills and technology along with their money. The seemingly immutable structure of global confrontation had suddenly buckled.
In particular, changes were unfolding in the successor states to the Soviet Union—Russia and the newly independent countries around the Caspian Sea—that would integrate the region with global markets. It was as if the twentieth century’s end was being reconnected back to the century’s beginning. The effect would be to broaden the foundations of the world petroleum supply. As an article in Foreign Affairs put it in 1993, “Oil is truly a global business for the first time since the barricades went up with the Bolshevik Revolution.”7
This observation had particular significance for Russia, the country that had been the home of the Bolshevik Revolution, and that now rivaled Saudi Arabia in its capacity to produce oil.
On the night of December 25, 1991, Soviet president Mikhail Gorbachev went on national television to make a startling announcement— one that would have been unimaginable even a year earlier: “I hereby discontinue my activities at the post of the President of the Union of Soviet Socialist Republics.” And, he added, the Soviet Union would shortly cease to exist.
“We have a lot of everything—land, oil and gas and other natural resources—and there was talent and intellect in abundance,” he continued. “However, we were living much worse than people in the industrialized countries were living and we were increasingly lagging behind them.” He had tried to implement reforms but he had run out of time. A few months earlier, diehard communists had tried to stage a coup but failed. The coup had, however, set in motion the final disintegration. “The old system fell apart even before the new system began to work,” he said.
“Of course,” he added, “there were mistakes made that could have been avoided, and many of the things that we did could have been done better.” But he would not give up hope. “Some day our common efforts will bear fruit and our nations will live in a prosperous, democratic society.” He concluded simply, “I wish everyone all the best.”1
With that, he faded out into the ether and uncertainty of the night.
His whole speech had taken just twelve minutes. That was it. After seven decades, communism was finished in the land in which it had been born.
Six days later, on December 31, the USSR, the Union of Soviet Socialist Republics, formally ceased to exist. Mikhail Gorbachev, the last president of the Soviet Union, handed over the “football”—the suitcase with the codes to activate the Soviet nuclear arsenal—to Boris Yeltsin, the first president of the Russian Federation. There were no ringing of bells, no honking of horns, to mark this great transition. Just a stunned and muted—and disbelieving—response. The Soviet Union, a global superpower, was gone. The successors would be fifteen states, ranging in size from the huge Russian Federation to tiny Estonia. Russia was, by far, the first among equals: it was the legatee of the old Soviet Union; it inherited not only its nuclear codes, but also its ministries and its debts. What had been the closed Soviet Union was now, to one degree or another, open to the world. That would redraw the map of world oil.
Among the tens of millions who had watched Gorbachev’s television farewell on December 25 was Valery Graifer. To Graifer, the collapse of the Soviet Union was nothing less than “a catastrophe, a real catastrophe.” He had been at the very center of the Soviet oil and gas industry. He had led the giant West Siberia operation, the last great industrial achievement of the Soviet system. Under him, West Siberia had reached 8 million barrels per day—almost rivaling Saudi Arabia’s total output. The scale of the enterprise was enormous: some 450,000 people ultimately reported up to him. And yet West Siberia was part of an even bigger Soviet industry. “It was one big oil family throughout all the republics of the Soviet Union,” he later said. “If anyone had told me that this family was about to collapse, I would have laughed.” But the shock of the collapse wore off, and within a year he had launched a technology company to serve whatever would be the new oil industry of independent Russia. “We had a tough time,” he said. “But I saw that life goes on.”2
One of the lasting ironies of the Soviet Union was that while the communist system was almost synonymous with force-paced industrialization, its economy in its final decades was so heavily dependent on vast natural resources— oil and gas in particular.
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