10 August 2010

The Prize -- The Review

Daniel Yergin's monster of a book was completed in 1990, right at the start of the first Gulf War and before the fall of the USSR. That means that you only get to learn about 1859--1989 while reading his 780 pp history of the oil business.

This book has been on my "to do" list for a long time, and I am glad that I read it. I now know a lot more about the oil business (and oil politics!). That knowledge provides useful insights into the the present and gives me some idea of what will happen in the future.

I will not give you a long summary of the book. For that, start with wikipedia. The short version of the book is:
  1. Americans started the oil industry with lighting; it was run by rough, smart, aggressive characters.
  2. Electricity killed the lighting market (kerosene), but the fuel market (diesel and gasoline) took its place.
  3. Before WWII, most oil was controlled by US and UK firms that worked all over the world; the US was the biggest producer.
  4. Mexico was first to nationalize its oil (breaking contacts with foreign companies) in 1938.
  5. Oil was important in WWI, when it helped machines replace horses. It was critical in WWII, when its absence choked the Nazis and a shortage nearly ended Britain's resistance.
  6. After WWII, supply outran demand, and prices dropped.
  7. Iran (under the Shah) fought with Saudi Arabia for title of biggest exporter. These "beggar thy neighbor" races for market share hurt everyone, in an echo of the same overpumping that harmed oil US producers in the 1920s.
  8. It was not until the 1980s that oil prices were really set in transparent markets; before then, they were set in long-term contracts, in bilateral negotiations that sometimes had nothing to do with economics.
In addition to this outline of trends, I made the following notes:
  • Water is not even CLOSE to oil in significance for military or political actions. It's VERY unlikely that an army would lose a battle for lack of water or a nation be invaded for its water supplies. That's because water is everywhere, but oil is not.
  • There were a lot of VERY smart people in the oil business. Global competition forced the best to the top. No such competition exists in the water world, either in terms of measured talent or productivity nor in terms of the size of the market or incentives to succeed or fail.
  • The Office of Price Administration (J.K. Galbraith was on staff and on topic) opposed raising prices in WWII, making it more likely that the US would have fuel shortages and the military would not have enough oil to fight. Vacations to Florida were making it more likely that the Axis would be the owners of Disney World.
  • The US was involved in Saudi Arabia from the start, and that involvement meant that the US was not too critical of mistakes or misrule in Saudi.
  • The first oil concessions favored capitalist companies. Producing countries then unilaterally rewrote contracts for 50/50 profit splits. New-comers offered more to get into the game. After awhile, most concessions were nationalized.
  • Everything changed in 1973, when the Arab -- not OPEC -- embargo against Israeli allies during the Yom Kippur War raised prices to levels never before seen. It's important to note that Small is Beautiful and Limits to Growth were in the public consciousness at the time. With the intellectual background in place, people saw the advantages to using less. It was a total change compared to use more more more...
    In the United States, the shortfall struck at fundamental beliefs in the endless abundance of resources, convictions so deeply rooted in the American character and experience that a large part of the public did not even know, up to October 1973, that the United States imported any oil at all. But, in a matter of months, American motorists saw retail gasoline prices climb by 40 percent -- for reasons that they did not understand... The embargo and the shortage it caused were an abrupt break with America's past, and the experience would severely undermine America's confidence in the future. [pp 616-7]
  • Oil exploration, production and distribution takes a lot of money, talent and coordination. The oil market was run like a big bureaucracy for many years, but many surprises and mistakes increased the cost of handling complexity. The rise of markets removed a lot of those problems, or at least minimized their harm.
This book provides an excellent background to how the oil business grew and changed the world. For more on the (financial, environmental and political) damage that oil causes us today, read Crude World.

Bottom Line: I give The Prize five stars for its clear and thorough exposition of an industry that gave us the good life today -- and the industry whose unsustainable product threatens to take that prosperity away.


  1. 1. There is a 2009 update to "The Prize." It consists of a few pages of new information at the end of the book.
    2. In assessing damage, it might be good to consider that without oil production about 6,000,000,000 of the 7,000,000,000 people on Earth would not exist. There would be no food, water, or heat for them and they would have killed each other in wars for the little food, water, and heat that did exist without oil. Also, without oil, the Allies would have lost WWI and civilized discourse would be conducted in German.
    3. A wonderful book.

  2. http://www.theoildrum.com/node/5802

    A review of "Crude World."

  3. @Eric -- I disagree on your #2. Most of those people -- even allowing that HUGE number -- would not have been born; those wars would have had different origins and motivations. Remember the dynamics. (Same goes for the Green Revolution and "saving" a billion lives.")

  4. Erik: Fossil fuels are a Johnny Come Lately contributor to human population. Agricultural technology, government x administration, and economics are the base drivers (will David place economics ahead of govt and admin?). Think about Mesopotamia, ancient China and India, Amerindian civilizations, inter alia. All had huge population. Industrially fixed N, the Haber Bosch process as beautifully described by Vaclav Smil is probably basal to fossil fuels as a root cause in the 20 C run up of population.

  5. Think about Mesopotamia, ancient China and India, Amerindian civilizations, inter alia. All had huge population.

    'Huge populations' were a couple of million people not hundreds of millions or billions.
    The peak population of Chaco Canyon has been estimated at 400 villages and a total of 5,000 people.


    It was enlightening for me to find that 'megacities' (so dubbed by archeologists) of ancient times were often only a few thousand people and that cities that grew to a million people (near Angkor Wat)ran out of food and water and collapsed. So, if I put the ancient world into numbers not adjectives, there were a lot fewer people. The lack of people changes all the other measures of impact on the planet.

  6. Erik: One widely respected scholar of world population, Michael Kremer has world population in 1800, at 900 million--- before much if any contribution from fossil fuels. In 1900, world population was about 1,625 million, at the dawn of the petroleum era and even before industrially fixed nitrogen. Lots of people! You are certainly right, that petroleum built upon the pre-fossil fuel basics (agriculture, hydraulic tech, govt and economics) to mutltiply the growth by many times.


    If you can't get the pub, I would be glad to email it to you.
    regards, Don

  7. Don,
    Please email the doc to me at

    The earlier population estimates are more subtle than I want them to be. For instance, the average human lifespan, before public health and antibiotics, was about 25 years. Some people lived a long time but many died in infancy, childhood, or childbirth. The caloric, water, and energy needs of these people was much different than the average needs of a Californian who lives to 75. I tend to forget how radically different life was even one hundred years ago and how those differences should change how I view the past.


  8. Never been born.
    @ David

    Would it be OK with you if you, your family, and your friends had never been born. People who talk about 'never been born' do not seem to consider that they are likely to have been among the unborn or that antibiotics or anesthetics might not have been invented because the civilization would not have enough excess resources to support inventors of these things.

  9. One of the many theories about the collapse of the Roman Empire was that they ran out of energy sources. Other than sailing ships, and probably a few water driven grain mills, everything had to be moved by man or beast, and those engines needed to eat. A lot. The Romans ran out of the ability to produce and distribute the grain their economy demanded, leading to economic problems, military ineffectiveness, and political discontent.

  10. @Eric -- that's a silly question ("never been born"), since it requires that I faced some choice/consciousness as far as entering the world is concerned. It's also NOT the equivalent to "prefer to be dead."

  11. David,
    Can I get an extended answer for the changes in the world if many of the people currently alive were not alive? Not semantics but well worked out economics, technology, resource usage, etc.
    People seem to want to duck this extended answer and try to dodge into semantics or ad hominem approaches, Lakoffian attempts at reframing.

  12. @Eric -- I can't leave an extended answer on a comment, and I can't write an extended answer without big computer models (got grant money?)

    Not that it would make any difference, since models just spit out variations on inputs...

    I'd say that there would be less innovation (fewer brains) but less stress on unpriced resources (the environment). What would our political systems, national borders and technology look like? Maybe the same as now. The economics would be very similar, since economics basically captures the "natural law" of humans...

    Anything else?

  13. @Eric - Do I understand you to say that having 6 billion people on the planet is a benefit? Because to me it seems like the root of all other problems. I don't quite understand what your argument is here. Fixation on the individual, maybe?

    Yes, less tech (as DZ says, fewer brains, but also less demand for innovation, in a steady-state economy). Less competition for resources = fewer resource wars. If the Allies had lost WWI, Europe might look a lot different; but WWI might not have happened, either. Is German an inherently inferior language for civilized discourse?

    I see a reactionary thinking mode in your comments that surprises me. Is this really the best of all possible worlds, just because you and I are in it?

  14. Whoops, meant to say WWII might not have happened.

  15. @ albionwood
    I am not saying that this is a best possible world. I am only asking for a practical, in depth discussion with all the tradeoffs discussed.

    The assumption that there exists some primitive Eden to which we should return seems naive. In the actual primitive Eden (for instance pre-industrial Euphrates valley), there were many fewer people and life was often brutish and short. Lifespan was 25 and people died of injuries, tooth decay, and infectious diseases that no longer are fatal. Even further back, hunter gatherers (see "Collapse") were very spread out.

    So when people talk about return to this mythical Eden, I would like them to lay out this Eden in its reality not Disneyify it.

    Similarly, when people say that we should return to a world with 1,000,000,000 people from a world with 7,000,000,000; I expect to see a practical, moral, ethical, compassionate plan to get there. I have not seen such a plan. In the standard presentations, all the necessary details are missing. The standard presentations come across to be as

    1. We want this because it is morally correct.
    3. We get what we want.

    I need a real explanation of statement 2.

    Does this make sense?

  16. Since World War II, the price of oil has averaged 1 ounce of gold = 15 barrels of oil. Today, August 16, 2010 it's: $1,224.5 per ounce of gold / 75.13 for one barrel of crude = 16.23ratio. Pretty close.

    There have been brief times when this ratio has been tested, as during the summer of 2008. But it quickly has gone back to the 15/1 ratio. The Arab boycott of 1973 was but a temporary glitch. The real reason for the American "oil crisis" in the 1970s was the "Nixon Shock" of 1971, when he both took America off the gold standard, sending oil from $35 an ounce to $800 an ounce in 1980; and imposed wage-and-price controls, creating artificial shortages.

    Reagan ended the last parts of the wage-and-price controls and, with Fed Chairman Volcker, steadied the dollar at $350 an ounce. End of the oil crisis.

    Unfortunately, after 9/11, Fed Chairman Alan Greenspan and President Bush took us of the gold standard, and oil prices have risen (against the inflating dollar) ever since -- both oil and gold have quadrupled in the past nine years, roughly maintaining the 15/1 ratio all the way up.

    This also shows that there is no shortage of oil. A shortage would mean a price increase -- an increase, of course, against gold, which is real money. But that hasn't happened.

    If we had stayed on the gold standard, today oil would still cost, as it did in the 1960s, about $2.33 a barrel.

    -- John Seiler

  17. The U.S. is one of the few countries in which oil and mineral rights mostly are in private, not government, hands. This encourages development because wildcat drillers, or mineral prospectors, work harder to find more deposits so they can make a large profit. It's a key to U.S. prosperity.

    Mexico would pump far more oil, and its people become more prosperous, if they privatized their oil business, especially the ownership of oil-drilling rights. Wildcatters would swarm in and develop vast new oil fields. Instead, the bloated and inefficient government bureaucracy that runs Pemex deprives Mexicans of much prosperity.

    The same is true of most other oil-producing countries.

    -- John Seiler


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