The United States dominated world oil production in the first half of the twentieth century. U.S. fields accounted for slightly more than 70 percent of world oil production in 1925, around 63 percent in 1941, and over 50 percent in 1950. The U.S. oil industry operated in a unique regulatory environment that included a permissive legal regime, generous tax treatment, and a cooperative system of national production control centered on the state of Texas, which accounted for almost half of total U.S. production. During the Great Depression, the federal government, several state governments, and the oil companies worked out a control system that placed a ceiling on total output and allocated production so that marginal producers could survive in the face of considerable excess capacity. Although Texas authorities refused to require producers to pool their extractive activities in each oil field, thereby allowing wasteful extractive processes to continue, the system allowed high-cost marginal wells to continue to produce, thus preserving lower-cost fields for future use. Higher prices also somewhat reduced consumption. With the Texas Railroad Commission as a balance wheel, the system remained in place until the early 1970s, when domestic production alone could no longer fill national demand.
In addition to being blessed with a thriving and productive domestic oil industry, five of the seven great oil corporations (the so-called Seven Sisters) that dominated the international oil industry from the 1920s to the 1970s were American companies. U.S. oil companies, along with British firms, dominated the oil industries of the two main producing countries in Latin America, Mexico and Venezuela, and had smaller holdings throughout the region. During the 1920s and early 1930s, the United States successfully supported efforts by U.S. oil companies to gain oil concessions in the Middle East. U.S. companies were also involved in regionally significant oil fields in the Netherlands East Indies. By the eve of World War II, U.S. companies accounted for nearly 40 percent of oil production outside the United States and the Soviet Union.
More importantly, the United States possessed the means to ensure the stability of the producing regions and gain access to their oil. The United States Navy had emerged from World War I second to none, thus providing the United States with the capability of securing access to overseas oil-producing areas. The United States was already firmly entrenched in the oil-rich Gulf of Mexico–Caribbean region before World War I for security reasons that predated oil's emergence as a strategic commodity. World War II and the Cold War reinforced traditional U.S. determination to maintain an economic and strategic sphere of influence in Latin America. Securing the Persian Gulf, which emerged as the center of the world oil industry following World War II, was more difficult for several reasons, including the region's distance from the United States, the involvement of rival great powers, and the dynamics of regional politics. Great Britain had emerged as the leading power in the Middle East following World War I. Following World War II, the United States gradually assumed Britain's role as the main guarantor of Western interests in the Middle East.
Oil became an important element in military power in the decade before World War I when the navies of the great powers, led by Great Britain and the United States, began to switch from coal to oil as their source of power. In addition, the major military innovations of World War I—the submarine, the airplane, the tank, and motorized transport—were all oil-powered. Although the surface fleets of the great powers played a relatively minor part in the fighting, German submarines wreaked havoc on British and French shipping and helped bring the United States into the war. In addition, oil carved out a role in the manufacture of munitions when the British, using a process developed by Royal Dutch/Shell, began extracting toluol, an essential ingredient in the explosive TNT, from oil. Access to oil became more important toward the end of the war with the transition from static trench warfare, with its limited demand for oil-powered machinery, to a more fluid operational environment in which tanks, motorized transport, and aircraft played a larger role.
Britain and France were able to draw on over-seas sources of supply from Iran, Mexico, and the United States, while the Germans were limited to oil from Romania. By the last year of the war, the United States was supplying more than 80 percent of Allied oil requirements, and the American navy was playing a key role in supplying and protecting tanker transport of oil to Europe. Although Lord Curzon's boast that the Allied cause had floated to victory on a wave of oil was an overstatement, severe shortages of oil in 1917 and 1918 threatened to immobilize the Royal Navy and the French army. In both cases, urgent requests to the United States for help led to the provision of the needed supplies. In contrast, without such external assistance, oil shortages hindered German military operations at critical points.
In addition to being a tremendous military asset, access to ample supplies of oil provided the United States with important advantages in the industrial transformation of the first half of the twentieth century. By the 1890s, the United States had overtaken Great Britain as the leading industrial power in the world, and by the 1920s, the U.S. economy was larger than the combined economies of the next six great powers (Great Britain, France, Germany, Italy, Soviet Union, and Japan).
Cheap and plentiful supplies of oil were a prerequisite for the automobile industry, which played a central role in the U.S. economy from the 1920s to the 1960s. Oil became the fuel of choice in land and sea transport as well as the only fuel for air transport, and challenged coal as the main source of energy for industry. Oil also played an important, if somewhat less crucial, role in heating and electricity generation, but oil-powered machinery became crucial to modern agriculture, and oil became an important feedstock for fertilizers and pesticides. Indeed, with the development of the petrochemical industry, oil reached into almost every area of modern life. Already almost one-fifth of U.S. energy consumption by 1925, oil accounted for around one-third of U.S. energy use by World War II. Outside the United States, in contrast, oil was a secondary fuel reserved mainly for transportation and military uses and accounted for less than 10 percent of energy consumption in western Europe and Japan before World War II.
The Soviet Union was the only other great power that possessed significant quantities of oil within its borders. The Russian empire had been the world's leading oil producer in 1900, accounting for more than half of world production. Soon thereafter a combination of geological and political problems caused output to plummet. Soviet oil production recovered rapidly in the 1920s, and by 1939 the Soviet Union was the second-largest oil producer in the world, far behind the United States and slightly ahead of Venezuela. Although the Soviets reentered exports markets briefly in the late 1920s, by the end of the 1930s almost all Soviet oil production was being devoted to internal uses.
The other great powers (Great Britain, France, Germany, and Japan) lacked indigenous oil reserves and were therefore dependent on foreign sources. Although British companies held concessions in Latin America, the Middle East, and Asia, maintaining access to this oil required stability in the oil-producing areas and control of the sea routes linking the oil-producing areas to Britain. British security policy called for the Mediterranean and the Middle East to be defended because they lay athwart land, sea, and air routes to India, the Far East, and the Pacific dominions. If the Mediterranean were closed, a prospect that seemed increasingly likely as Britain's relative power declined in the 1930s, access to Middle East oil would be very difficult, assuming that the oil fields and other facilities could be defended. Production in the Far East was not great, and access to its oil would be even more difficult to defend in wartime. Wartime access to Western Hemisphere oil would be dependent on the acquiescence and probably the assistance of the United States, to which Britain had conceded regional supremacy shortly after 1900 and whose help would be needed to transport the oil safely across the Atlantic. This dependence on the United States for vital oil supplies was a critical weakness in Great Britain's power position.
During the 1930s, the British government studied the possibility of reducing its reliance on imported oil by using Britain's ample coal supplies as a source of synthetic oil. It rejected this alternative on security grounds, concluding that, given the British position in the major oil producing areas and the strength of the Royal Navy, reliance on imported oil would be less vulnerable to interdiction than large synthetic oil plants that would be conspicuous targets for air attack.
France's stake in foreign oil was largely limited to a share in Iraqi oil production and a few holdings in Romania. Access to Iraq, which by 1939 supplied almost half of France's oil imports, was dependent on British assistance to keep the Mediterranean open and the Middle East secure. Romania was able to fill only a small portion of French oil requirements, and access to Romanian oil would be unreliable in the event of a conflict with Germany. Access to Western Hemisphere oil, the other source of French imports, was dependent on U.S. goodwill and assistance. The French also explored extracting oil from coal and using alcohol as a motor fuel, but neither alternative provided sufficient supplies to relieve France's dependence on imported oil. France was thus doubly dependent, needing British and U.S. cooperation to ensure access to oil.
German and Japanese oil companies had been shut out of the major foreign oil-producing areas, leaving both nations dependent on foreign companies for necessary supplies and thus vulnerable to economic and political pressure. Moreover, their access to oil in the Middle East and the Western Hemisphere was threatened by British and U.S. control of the oil-producing areas and Anglo-American command of the sea routes to these regions.
Convinced that oil was essential to fuel his ambitions, Nazi leader Adolf Hitler moved to promote the development of a synthetic fuel industry in Germany shortly after taking power in 1933. By the outbreak of World War II, coal-derived synfuels accounted for nearly half of Germany's peacetime oil needs. The process of extracting oil from coal was complicated and expensive, and the huge installations required massive amounts of steel and were very vulnerable to air attack. Therefore, obtaining access to oil that did not depend on sea routes subject to interdiction by enemies remained an important part of Nazi expansionist strategy.
Germany received large quantities of oil from the Soviet Union under the terms of the 1939 Nazi-Soviet Pact, and in November 1940 gained assured access to Romanian oil when Romania was forced to adhere to the Tripartite Pact. These supplies were inadequate for Germany's needs, leading Hitler to look to the conquest of the rich oil fields of the Caucasus as a way to gain oil for Germany's highly mechanized military machine. Thus, the desire to gain assured access to oil was an important factor in Hitler's decision to invade the Soviet Union in June 1941.
Obtaining access to oil was also a key factor behind Japan's decision to attack the United States. By the end of the 1930s, Japan was dependent on the United States for 80 percent of its oil needs. Most of the rest came from the Netherlands East Indies, where Shell and the Standard-Vacuum Oil Company, a jointly owned subsidiary of Standard Oil (New Jersey) and Socony-Vacuum, controlled production. The Netherlands East Indies possessed the largest reserves in East Asia, and control over its oil would go a long way toward meeting Japan's oil needs. On the other hand, seizing the Netherlands East Indies would lead to conflict with Great Britain and the United States. Nevertheless, the Japanese chose this course after the United States, Britain, and the Netherlands imposed an oil embargo on Japan in the late summer of 1941 in response to Japan's decision to take control of all Indochina.
World War II marked the apogee of oil's direct military importance, and the role of oilpowered weapons systems demonstrated that oil had become the lifeblood of the modern military machine. All the key weapons systems of World War II were oil-powered: surface warships (including aircraft carriers), submarines, airplanes (including long-range bombers), tanks, and a large portion of sea and land transport. Oil continued to play an important role in the manufacture of munitions, and the development of petroleum-based synthetic rubber helped relieve Allied dependence on Southeast Asian natural rubber supplies, most of which were in the hands of the Japanese for much of the war.
The United States entered World War II with a surplus production capacity of over one million barrels per day, almost one-third of U.S. production in 1941. This margin enabled the United States, almost single-handedly, to fuel not only its own war effort but that of its Allies, once the logistics of transporting the oil safely across the Atlantic had been mastered. In addition, U.S. leadership in oil-refining technology provided the U.S. military with such advantages as 100-octane aviation gasoline and specialty lubricants needed for high performance aircraft engines.
The Soviet Union also benefited from having indigenous oil supplies. The Soviets were able to retain control of the vital Caucasian oil fields, and rushed new fields in the Volga-Urals region, safely removed from the fighting, into production. These successes helped Soviet forces attain the mobility necessary to repel the German invaders and go on the offensive.
German and Japanese failure to gain secure access to sufficient oil supplies was an important factor in their defeat. German synthetic fuel production proved barely adequate for wartime requirements, and failure to gain control of the rich oil fields in the Caucasus, coupled with setbacks in the Middle East and North Africa, left the German military vulnerable to oil shortages throughout the war. Indeed, Germany was able to hang on as long as it did only because the absence of a second front until the summer of 1944 kept oil requirements at manageable levels. In the late summer of 1944, the Allied bombing campaign began belatedly targeting synthetic fuel plants. By the end of the war, the German war machine was running on empty.
The Japanese gained control of the Netherlands East Indies in 1942, but many of the oil facilities had been sabotaged and took time to restore to full production. More importantly, transporting oil from the East Indies to Japan proved increasingly difficult owing to the remarkable success of U.S. submarines in interdicting Japanese shipping. By late 1944, Japan faced serious oil shortages, with crippling military consequences.
With the exception of the jet engine, the major military innovations of World War II—radar, ballistic missiles, and the atomic bomb—were not oil-powered. Nevertheless, oil remained central to the mobility of land, sea, and air forces. Despite the development of nuclear-powered warships (mainly aircraft carriers and submarines), most of the world's warships remained oil-powered, as did aircraft, armor, and transport. In addition, each new generation of weapons required more oil than its predecessors. Thus, while the advent of the atomic age meant that access to oil would not have been a key factor in a full-scale war between the United States and the Soviet Union, which presumably would have been fought primarily with nuclear weapons and ballistic missiles, such conflicts as the wars in Korea, Vietnam, and the Persian Gulf were fought with conventional, largely oil-powered weapons, thus demonstrating the continued centrality of oil-powered forces, and hence oil, to military power.
Oil's economic importance increased after World War II as the United States intensified its embrace of patterns of socioeconomic organization premised on high levels of oil use, and western Europe and Japan made the transition from coal to oil as their main source of energy. U.S. and world oil consumption skyrocketed in the 1950s and 1960s. Between 1950 and 1972, total world energy consumption increased 179 percent, much faster than population growth, resulting in a doubling of per capita energy consumption. Oil accounted for much of this increase, rising from 29 percent of world energy consumption in 1950 to 46 percent in 1972. By 1973, oil accounted for 47 percent of U.S. energy consumption. Western Europe and Japan were even more dependent on oil for meeting their energy needs; by 1973 oil accounted for 64 percent of west European energy consumption and 80 percent of Japanese energy consumption.
Control of oil played a vital role in establishing and maintaining U.S. preeminence in the postwar international system. Adding to its domestic power base, the United States consolidated its control of world oil in the decade following World War II. By the mid-1950s, U.S. oil companies were firmly entrenched in the great oil-producing areas outside the Soviet Union. Equally, if not more important, the United States, as the dominant power in the Western Hemisphere, controlled access to the region's oil, and the United States alone had the economic and military power to secure Western access to Middle East oil.
The Soviet Union also possessed a powerful domestic oil industry, but despite geographical proximity, extensive efforts, and widespread anti-Western sentiment in Iran and the Arab world, the Soviets failed to achieve a secure foothold in the Persian Gulf and had little impact on the region's oil industry. The Soviets had even less influence over the Western Hemisphere's oil producers. Indeed, the U.S.-led economic boycott of Cuba forced the Soviets to supply the one foothold they possessed in the Western Hemisphere with oil at subsidized prices.
The strong position of the United States in world oil provided multiple advantages. In addition to being central to military power and economic prosperity, control of oil gave the United States leverage over its allies and its former and prospective enemies. U.S. policymakers saw economic growth as essential to preventing the recurrence of the divisive ideological and social conflicts of the interwar years. Soviet expansion into eastern and central Europe as a result of World War II left the Soviet Union in control of almost all of Europe's known indigenous oil reserves as well as important sources of coal in Poland and the Soviet zone of Germany. Making matters worse, postwar western Europe faced a coal shortage of alarming proportions owing to wartime overproduction and destruction and postwar food, transportation, and other problems.
To fuel economic recovery and to prevent western Europe from becoming dependent on the Soviets for energy, the United States sought to ensure that this critical area received the oil it needed. Economic growth, in turn, was crucial to mitigating the divisive class conflicts that had divided European and Japanese society in the first half of the century. Economic growth and prosperity undercut the appeal of leftist parties, financed the welfare state, perpetuated the ascendancy of moderate elites, and sustained the cohesion of the Western alliance. By controlling access to essential oil supplies, the United States was able to reconcile its aim of German and Japanese economic recovery and integration into a Western alliance with that of ensuring against the recurrence of German and Japanese aggression.
Economic growth in western Europe and Japan was central to the containment of Soviet power and influence during the Cold War because it helped prevent these areas from falling to communism through internal processes. Finally, for many years after World War II the Soviets lacked sufficient oil to fight a major war. Hit hard by wartime damage, disruption, transportation problems, equipment shortages, and overuse, Soviet oil production dropped after the war, and the Soviet Union was a net importer of oil (mostly from Romania) until 1954. Exclusion of the Soviets from the Middle East retained oil for Western recovery, and kept the Soviets short of oil. In addition, U.S. and British strategic planners wanted to keep the Soviets out of the Middle East because the region contained the most defensible locations for launching a strategic air offensive against the Soviet Union in the event of a global war. Throughout the Cold War, ensuring Western access to Middle East oil was a basic objective of U.S. foreign policy.