Chapter Excerpt


Hardly a day goes by in which oil -- whether in terms of its price, its impact on the economy, its role in international relations and in the environment -- is not in a major newspaper story or in the television news or a hot topic on the blogs.

The questions are many. How does oil change international politics and the strategies and positions of nations? What are the political and economic risks that come with oil, and how to manage them? Is the world going to run out of oil? Or is demand going to change? How, within a single ten-year period, could oil be as low as $10 a barrel and as high as $147.27, and then within a few months drop to $63 and what is the prospect for prices? There's also the whole question of climate change. What is the future for Hydrocarbon Man?

And yet none of these questions, in their essence, is new. In one form or another, they play out again and again across the pages ofThe Prize.Indeed, it is hard to make sense of these questions today without understanding where they come from and how oil has come to have such a defining role in the modern world, in everything from daily life to the game of nations. From these pages readers can draw many lessons and insights that are relevant to sound energy policy, to energy security, and -- it is hoped -- to clear thinking about energy.

The competition for oil and the struggle for energy security seem to never end. And yet, with the swift victory to the Gulf War in February 1991, the strategic struggle over oil did appear to be over. The threat that a hostile power would dominate the Persian Gulf was no more. That, it now seemed, was part of a larger transformation. For the year that began with Operation Desert Storm in Iraq ended in December 1991 with Mikhail Gorbachev, president of the Soviet Union, going on Russian television to deliver a twelve-minute speech in which he announced what would have seemed almost impossible a few years earlier: the dissolution of the Soviet Union. The communist empire had collapsed, the Soviet Union had disintegrated, and the Cold War had ended. The threat of nuclear war that had hung over the planet for four decades was lifted, and a new era of peace was at hand.

Although the Soviet Union had been a significant oil exporter, its industry had been isolated behind the Iron Curtain. No longer. With the breakup of the Soviet Union, the petroleum industry of the Russian Federation and the newly independent states, notably Kazakhstan and Azerbaijan, would be integrated with the global industry. Eventually, after years of wrangling, the Baku-Tbilisi-Ceyhan pipeline would link historic Baku, on the Caspian Sea, to a Turkish port on the Mediterranean -- in part, a twenty-first-century parallel to the route pioneered by the Nobels, Rothschilds, and Samuels in the late nineteenth century. This pipeline, by providing an alternative to shipping oil through the Russian pipeline system, would help to underwrite the position of those newly independent states of the former Soviet Union. When the Russian-Georgian confrontation broke out in 2008, it highlighted the security issues surrounding long-distance pipelines that cross international borders. But that would still be some years in the future.

As it was, in the early 1990s, the outcome of the Gulf War and the collapse of the Soviet Union transformed the international system. Some spoke optimistically of a new world order. The focus of the international community shifted from security to economics and growth and to what was coming to be known as globalization. In the years that followed, there was a vast expansion of international trade, as globalization led to a more open and interconnected world economy and to rising incomes in what had heretofore seemed permanently poor countries.

For most of the 1990s, oil receded as a grand strategic issue. Petroleum supplies were abundant, and prices were low. Much attention was given to the "East Asian economic miracle" and to what was beginning to appear behind it, the emerging role of China in the world economy. But, in 1997-98, Asia's economic miracle, stoked by currency flows and real estate speculation, overheated and then, beginning in Thailand, blew up. The result was a lethal contagion -- an epidemic of financial panic, bankruptcies, and defaults and a deep economic downturn that spread across much of Asia (though not China and India) and then engulfed other emerging markets, including Russia and Brazil.

The collapse in GDP led to a drop in oil demand even as oil supplies were increasing. As a result, inventory tanks filled to overflowing until there was no place to put the additional oil. Once again, as in 1986, the price of oil collapsed toward $10 a barrel and, in some cases, even lower. Oil exporters were once more thrown into economic disarray, as in 1986. The collapse in oil prices sent Russia, only in its seventh year as an independent country, into default and bankruptcy and into what turned out to be an agonizing reappraisal of its relationship with the rest of the world.

But for the oil-importing nations -- both for developed countries such as the United States, Japan and those of Europe, and for many developing countries -- the fall in oil prices was like a giant tax cut, a stimulus package that fired up economic growth. It put a lid on inflation, permitting faster growth. At the gasoline pump in the United States, it pushed prices down, in inflation-adjusted terms, to the lowest level they had ever been. This ignited a great new romance -- a passion for fuel-inefficient SUVs and other light trucks, which would soon comprise half of the new vehicles sold in the United States.


Low prices put great pressure on the structure of the industry. As revenues fell away, company managements struggled to find survival strategies. Budgets had to be immediately cut, and projects were either postponed or cancelled altogether. There was another way to survive as well. That was by getting bigger, gaining greater scale. The objective: to bring down costs and increase efficiency. The need for corporate scale in this environment was made more urgent because of the bigger and more complex oil and gas projects that lay ahead and the much greater financial resources that would be required to make them happen. In the 1990s, mega-projects, many of them in offshore waters, might have been defined in hundred of millions of dollars, perhaps even a billion. But the term "mega-project" would need redefining, as the industry was beginning to plan for projects in the twenty-first century that would cost $5 or even $10 billion.

All of this created the imperative for what became known as restructuring. That meant reshaping not only individual companies but the industry itself. The oil majors that the Italian tycoon Enrico Mattei had dubbed the Seven Sisters (minus Gulf, which was already gone) would be remade. The majors combined to become supermajors. BP merged with Amoco to become BPAmoco, and then merged with ARCO, and emerged as a much bigger BP. Exxon and Mobil -- once Standard Oil of New Jersey and Standard Oil of New York -- became ExxonMobil. Chevron and Texaco came together as Chevron. Conoco combined with Phillips to be ConocoPhillips. In Europe, what had once been the two separate French national champions, Total and Elf Aquitaine, plus the Belgian company Petrofina, combined to emerge as Total. Only Royal Dutch Shell, already of supermajor status on its own, remained as it was. Or, rather, it went through a self-merger. It finally did away with the complex system of two separate holding companies, Royal Dutch and Shell, run from the Hague and London, that Henri Deterding and Marcus Samuel had forged in 1907 as their grand bargain. Instead, it became a unitary company in order, among other things, to improve the efficiency of its operations and speed up decision making. With all these mergers, the landscape of the international oil industry changed.

Overall, in the late 1990s, in the minds of the wider public and many policy makers, oil faded away. So did concerns about energy security. People assumed, if they thought about it at all, that petroleum would be cheap and readily available for years to come. Instead, there were new things and "new new" things about which to get excited. Specifically, that meant the Internet, which brought the New Economy and a revolution in communications. The world would be interconnected twenty-four hours a day and distance would disappear. Information technology, start-ups, Silicon Valley, cyberspace -- those were the places to be. Few things seemed as old economy as the petroleum industry, and its relevance seemed to decline. Fewer young people were interested in pursuing jobs in the industry, which was just as well, as there were fewer jobs to pursue.

The Return of Oil

But three things in the first half of this decade were to change the picture.

The first was September 11, 2001. What had been unthinkable, and yet had been forewarned in a passing paragraph in a Presidential Daily Brief in August 2001, took place with the crashing of two hijacked airliners into the World Trade Center and a third into the Pentagon and the planned attack with a fourth on the U.S. Capitol that was aborted over Pennsylvania. For the first time since the assault on Pearl Harbor on December 7, 1941, which had taken the United States into World War II, the United States had been attacked, and with great loss of life. The enemy was the jihadist Al-Qaeda movement.

International relations were transformed. In the autumn of 2001 -- responding to the September 11 attacks on New York and Washington -- the United States and its allies counterattacked in what became known as the war on terror. They carried the war back to Afghanistan, the base from which Al-Qaeda operated. They quickly drove the ruling Taliban, Al-Qaeda's ally, from power, and achieved what at the time seemed to be a swift victory.

Attention turned back to Iraq. The victory in the Gulf War had also been swift. But it had not been complete. Fearful of a quagmire and the risks of an occupation, the American-led coalition had stopped short of Baghdad in 1991. Saddam Hussein had remained in power, though contained by economic sanctions, isolation, inspections, and no-fly zones in the north, over Kurdistan, and in the predominantly Shia south. But now, after 9/11, proponents of striking at Iraq argued that Saddam had links to Al-Qaeda and was still secretly seeking weapons of mass destruction. President George W. Bush determined to launch this war with the advice of some of his father's former top advisers, now in his own administration -- but also against the strong warnings of other of his father's advisers. "An attack on Iraq at this time would seriously jeopardize, if not destroy, the global counterterrorist campaign we have undertaken" cautioned his father's national security adviser, Brent Scowcroft, in August 2002. "It would not be a cakewalk.... If we are to achieve our strategic objectives in Iraq, a military campaign in Iraq would likely have to be followed by a large-scale, long-term military occupation." But momentum toward war was very strong.

On March 20, 2003, some twelve years and twenty-one days after the end of the earlier Gulf War, the Iraq War began. Historians may well come to call this the Second Gulf War. This time the coalition was much smaller in terms of the number of participating countries -- "the coalition of the willing." Britain was the most important partner. Other of America's key allies, specifically France and Germany, opposed war and did not join the coalition. They thought that the U.S. administration was too optimistic and underestimated the risks and the difficulties that woud be waiting in postwar Iraq.

The clear assumption among the war's proponents was that it would be quick -- a "lightning victory." The actual war went pretty much as planned and pretty quickly. Already by April 9, 2003, Iraqi civilians and U.S. marines were joining together to pull down the giant statue of Saddarn Hussein in the center of Baghdad. But virtually nothing that followed went as planned. Saddam disappeared into hiding. No weapons of mass destruction were ever found. Multiple insurgencies developed across the country, as out-and-out civil war developed between Sunnis and Shias. More than half a decade after the war began, U.S. troops were still in Iraq; Iraqi politicians were still arguing over responsibility for the oil resources between the central government and the regions; and the Iraqi oil industry, short of technology and skills and security, was still struggling to regain the levels of production that had preceded the war.

Yet, while violence continued to dominate Iraq, striking changes were happening elsewhere in the Persian Gulf and the wider Middle East. In a dramatic reversal, Libya renounced nuclear weapons in December 2003 and rejoined the international community. With the buildup of oil and natural gas revenues, the emirates of Abu Dhabi, Qatar, and Dubai emerged as key players and new centers of the global economy in the twenty-first century. When a tumultuous credit and banking crisis swept the United States and Europe in 2007 and 2008, some of these emirates were at the forefront in bailing out Western financial institutions.

But the mission the Bush administration had assigned itself -- to bring democracy to the region -- proved short-lived. Instead, there was widespread apprehension that the ultimate victor from the Iraq War could be Iran, whose Islamic revolution had set off the second oil shock in 1978 and which now saw itself as the regional power in the Gulf -- the very role that first the Shah of Iran and then, after him, Saddam Hussein had sought to capture. But it was also clear that neither Saudi Arabia nor the other Gulf countries had any intention of being under such a sway.

The second key feature of this era has been globalization. Between 1990 and 2009, the world economy almost tripled in size. And by 2009, a significant share of the world's GDP was being generated in the developing world, rather than in the traditional grouping of North America, Europe, and Japan.

The New Economy and the Internet notwithstanding, globalization made oil more important again. Of key significance was the period 2003-2007, which saw the best global economic growth in a generation. High economic growth and rising incomes in China, India, the Mideast and other emerging countries meant strong growth in oil demand -- to power industry, to generate electricity, and to fuel the rapidly growing fleets of motor cars and trucks.

This surge in oil demand -- the third feature -- caught by surprise not only consumers but also the global oil industry itself. The preceding decades of slow growth in demand had translated into relatively low levels of investment in new oil and gas supplies. In the late 1990s and first years of the next decade, Wall Street had demanded that the industry be "disciplined" -- very cautious and even restrictive in its investment -- or face retribution in terms of a lower stock price. Now the industry had to play catch-up in terms of investing in new capacity to produce oil. That effort could not be mustered overnight, or even in a few years. The balance between demand and available supply narrowed dramatically. Geopolitics of one kind or another further constrained supply. At the end of 2002 and in early 2003, strikes and political conflict in Venezuela temporarily shut down its oil production, the first step on the staircase of rising prices. Beginning in 2003, attacks by militias and criminal gangs disrupted output in Nigeria, one of the world's leading suppliers -- sometimes cutting production by as much as 40 percent. Over the following years, production capacity declined in both Venezuela, where President Hugo Chávez had placed tight political controls on the national industry, and Mexico, where domestic politics restricted needed investment.

Russia's oil output had plummeted in the 1990s after the collapse of the Soviet Union. But it had begun to recover in the late 1990s and then grew by 50 percent in the first half of the following decade. At times it has been the world's largest producer of oil, ahead of Saudi Arabia. But in the last few years the growth rate of its production has slowed and then flattened out altogether.

A New Oil Shock

A surge in demand, a slow response in supply, and a narrow balance between the two -- this mixture would have led to higher prices in any event. But it was amplified by Iran, which was having, as it recurrently had had over four decades, its own sharp impact on world oil. Iran had relaunched an aggressive program of nuclear development, which included the fuel enrichment technology that would enable it to move easily to nuclear weapons. While trumpeting its program, Iran insisted that it was only seeking to develop civilian nuclear power. The European Union and the United States observed that Iran possesses the second-largest natural gas reserves in the world. They had little doubt that Iran's real objective was a nuclear weapons capability. Certainly, the prospect of a nuclear-armed Iran inevitably caused deep apprehension in Israel when the Iranian president repeatedly threatened to "eliminate this disgraceful stain from the Islamic world" and declared that Israel "must be wiped off the map." Moreover, especially among EU countries, Iran's nuclear ambitions were seen as a major risk for proliferation, as a nuclear Iran might trigger a nuclear race in the Middle East. In these circumstances, an "Iranian premium" -- concern over whether stalemate and confrontation over Iran's nuclear program would lead to conflict and threaten oil flows through the Strait of Hormuz -- became an additional element in a higher oil price.

Two further factors drove prices to unprecedented levels. One was a dramatic increase in the costs of developing new oil and gas fields -- more than doubling between 2004 and 2008. This arose because of shortages -- of skilled people, equipment, and engineering capabilities -- combined with a rapid rise in the price of other commodities, such as steel, that are required to build offshore oil platforms and other equipment.

The other was the growing involvement by financial investors in oil and other commodities. Oil came to be seen as an asset class that provided an alternative to stocks, bonds, and real estate for pension funds, university endowments, and other investors seeking higher returns. At the same time, traditional commodity investors, speculators, and traders also put more money on the table. The complex role of financial players in the oil market became a very contentious question as people argued over the role of investors and the impact of speculation in the oil price. Continuing weakness of the dollar against the euro and Japanese yen further drove up the price of oil and other commodities as investors sought to hedge against the dollar's decline. A strengthening dollar would be accompanied by a reverse in the oil prices.

Expectations became important as oil prices steadily rose from 2003. There was a widespread apprehension, especially within financial markets, that demand from China and India would go through the roof and that an oil shortage was inevitable in the next several years. All these factors -- supply and demand, geopolitics, costs, financial markets, and expectations -- came together to carry oil prices from $30 at the beginning of the Iraq War through $100 and $120 and then $130 and then over $145 a barrel. By that point, expectations had created a bubble in which the price was increasingly divorced from the fundamentals. For, as prices went up, demand had -- inevitably -- begun to weaken.

The oil shocks of the 1970s were precipitated by specific events -- the 1973 Yom Kippur War and the Arab oil embargo, and the 1978-79 Islamic revolution in Iran. This time was different in that there was no single dramatic event. Yet there was no question but that the extraordinary rise in prices constituted another oil shock of its own. In the United States, the painful economic impact of the oil shock was made much worse by the credit crisis that erupted in mortgage and banking sectors. Moreover, the shock was increasingly felt around the world. It was only when demand growth slowed markedly, in response to high prices, a financial crisis worse than any since the Great Depression, a world economic downturn, that the price came down dramatically.

The half-decade rise in oil prices had brought significant changes in the global economy and dramatic shifts in income. Trillions of dollars flowed from oil-importing countries to the exporters -- one of the greatest transfers in income in the history of the world. The accumulation of oil wealth in the savings accounts of the exporters -- their sovereign wealth funds -- has made them powerful forces in the world economy, putting them in the position, as noted earlier, to step in and help bail out troubled banks in the United States and Europe.

The economic shifts also brought political consequences. One of the major themes ofThe Prizeis the continuing struggle between consumers and producers over the money and power that accrue from petroleum resources. This is a balance that is always shifting. In this era of high prices, what is called resource nationalism has again come to the fore, although in many different forms. Oil wealth enabled Venezuela's President Chávez to expand his influence over Latin America and pursue his agenda of "socialism for the twenty-first century" across the world stage. In 1998 Russia had been bankrupt. A decade later, bolstered with almost $800 billion dollars of foreign reserves and savings in its sovereign wealth funds, Russia was projecting its power and influence around the world. Its position as an oil exporter and as the key natural gas exporter to

Europe -- and seven years of strong economic growth -- had put it in a new position of primacy. In other countries, the government decision-making that is required for new petroleum development slowed down and stalled, and thus the development of new resources also slowed.

"NOCs" -- National Oil Companies

It turned out that the restructuring of the world oil industry that had started with the emergence of the supermajors at the end of the 1990s was only the beginning. One more merger -- of Norway's Statoil and Norsk Hydro -- created StatoilHydro, a new supermajor, although partly state-owned. But the balance between companies and governments has shifted dramatically. Altogether, all the oil that the supermajors produce for their own account is less than 15 percent of total world supplies. Over 80 percent of world reserves are controlled by governments and their national oil companies. Of the world's twenty largest oil companies, sixteen are state-owned. Thus, much of what happens to oil is the result of decisions of one kind or another made by governments. And overall, the government-owned national oil companies have assumed a preeminent role in the world oil industry.

In these circumstances, the cast of characters in the world has become more complex, with a host of companies joining the ones whose names run through this book. Some of these companies have already appeared in these pages; some are new. Saudi Aramco -- the successor to Aramco, now state-owned -- remains by far the largest upstream oil company in the world, single-handedly producing about 10 percent or more of the world's entire oil with a massive deployment of technology and coordination. The major Persian Gulf producers control for the most part their production, as do the traditional state companies in Venezuela, Mexico, Algeria, and many other countries. The Chinese companies -- partly state-owned, partly owned by shareholders around the world -- continue to produce the majority of oil in China but have also become increasingly active and visible in the international arena. So have Indian companies. The Russian industry is led by state-controlled giants Gazprom and Rosneft and as well by privately held companies, such as Lukoil, that are majors in their own right.

Petrobras, the Brazilian national oil company, is 68 percent owned by investors and 32 percent by the Brazilian government, though the government retains the majority of the voting shares. Petrobras had already established itself at the forefront in terms of capabilities in exploring for and developing oil in the challenging deep waters offshore. Beginning with the Tupi find in 2006, potentially very large discoveries are being made in what had heretofore been inaccessible resources in Brazil's deep waters, below salt deposits. These discoveries could make Petrobras -- and Brazil -- into a new powerhouse of world oil. Malaysia's Petronas had turned itself into a significant international company, operating in 32 countries outside Malaysia. State companies in other countries in the former Soviet Union -- KazMunayGas in Kazakhstan and SOCAR in Azerbaijan -- have also emerged as important players. While Qatar is an oil exporter, its massive natural gas reserves put it at the forefront of the liquefied natural gas industry (LNG) and, along with Algeria's Sonatrach and other exporters, at the center of growing global trade in natural gas.

China's companies are increasingly prominent in the global industry. For a few years, there was fear that a battle for oil resources between the United States and China was almost inevitable. Despite disagreements between the two countries over specific issues, the overall fear seemed to fade as it became clear that both countries share common interests as oil importers and consumers and that energy is part of a larger framework of economic integration and overlapping interests between the two countries.

"Running Out?"

The rise in oil prices in the nineties has fueled the fear that the world is running out of oil. This anxiety has taken on a name -- "peak oil." Yet such fears are also part of a long tradition in the world. For the current language and apprehensions bear striking resemblance to earlier periods. As described in these pages, there was a widespread conviction in the 1880s that when the wells ran dry in western Pennsylvania, the days of oil would be over. Similar fears were registered in the years right after World War I. Such concerns reappeared in the years after World War II, with memories fresh of the strategic role of oil in the war, and as the locus of world production shifted, in accord with Everette DeGolyer's 1944 prophecy, from the U.S. Gulf of Mexico to the Persian Gulf. And that same conviction about shortage underlay the panic that gripped the oil industry and the world community during the oil crises of the 1970s. In each case, new territories, new horizons, and new technologies banished the fears within a few years; and indeed, in each case, shortage gave way to surplus.

But is this time different? That is a contentious question, which arouses strong passions. It is also a question that appropriately requires thoughtful, careful analysis, for the stakes are very high. Field-by-field analysis suggests that there are ample resources below ground to meet world demand for several years.

But there are three important qualifications. The first is that the aboveground risks -- geopolitics, costs, government decision making, complexity, restrictions on access and investments -- can hamper development and lead to tight supplies and high prices. It is striking to see the shift toward a focus on these aboveground risks as the key factors. The second is that an increasing share of liquid supplies will be nontraditional oil -- whether from such challenging environments as the ultra-deep offshore waters and the Arctic, or Canadian oil sands, or from the associated liquids that are produced with the growing volumes of natural gas. Many of these nontraditionals are more complex and difficult -- and expensive -- to bring on. The third is the recognition of the sheer scale in the years ahead of demand growth in the new giants, China and India, and other developing economies and the enormous challenge of meeting it.

Climate Change

One further factor critical to the future of oil emerged as a decisive factor only after the turn of the century: climate change. Initially, representatives of eighty-four countries signed the 1997 Kyoto Protocol aimed at reducing CO2 emissions. The European countries later adopted the treaty and made climate change a cornerstone of their policies. But the U.S. Senate rejected the Kyoto treaty by a vote of 95 to 0. There were three main concerns. The first was the impact of CO2 restrictions on the overall economy and economic growth. The second specifically concerned restrictions on coal, from which half of the nation's electricity was generated. And the third was that the treaty would require cutbacks from the industrial countries, but not developing countries.

A decade later, attitudes have changed dramatically in the United States. The climate change issue has been embraced across almost the entire U.S. political spectrum, and it is generally expected that a national climate change regime will be enacted over the next few years. Yet complex questions are still to be addressed. There is a debate as to the costs of moving to a lower-carbon-emissions society as well as the choice between a cap-and-trade system and a carbon tax. Half of U.S. electricity is still generated from coal; and how to move toward a much lower carbon impact for coal has yet to be demonstrated at scale. In the meantime, developments in the world economy have emphasized that third concern cited above -- the need to bring the major developing economies into a climate change framework. At the end of 2007, China overtook the United States as the world's number one emitter of CO2. Carbon management is likely to be a contentious focus for international diplomacy in the years ahead.

Energy Security

Oil imports have been a political and strategic concern since the United States moved from being on oil exporter to an oil importer in the late 1940s. Today those concerns have been amplified both because of the outflow of money and because of turbulence and extremism in parts of the Middle East, the recruiting base for Al-Qaeda. But those import numbers do require some clarification. It became common to assert that the U.S. imports 70 percent of its oil. In fact, in 2008, on a net basis, it was importing about 56 percent of its oil -- still a very substantial amount. There was also a widespread belief that most or all of U.S. imports came from the Middle East. That is actually not the case. Some 22 percent of imports come from Canada, part of the overall trade flows with the country that is the United States' largest trading partner, and 12 percent from Mexico. Supplies from the Middle East (including Iraq) constitute 22 percent of total imports and about 12 percent of total U.S. oil consumption. Altogether, petroleum -- both domestically produced and imported -- provides about 40 percent of the total energy on which the United States' $14 trillion economy operates. Nevertheless, a confluence of concerns turned "ending the addiction to oil" into a common phrase of political discourse in the United States, even if the definition of addiction still needed some clarification.

The need for new supplies -- conventional, renewables, and alternatives -- plus price and security and climate concerns has unleashed a wave of innovation and research all across energy industries. But how fast will change come? Certainly energy will be a major policy focus. Barack Obama described energy as "priority number one." Technology and markets will provide the answer over time. Many renewables, such as wind and photovoltaics, provide electricity and will do little to supplant oil imports, as only 2 percent of U.S. electricity is generated from oil -- unless there is a big growth in electricity-powered transportation. Indeed, transportation is critical. Whatever the innovations -- and much is in the works -- the auto fleet will not change overnight. It can take five or six years, and a billion dollars to bring new models to market. Only about 8 percent of the auto fleet turns over each year, and so it will take years for the impact to be felt.

But in five or ten years the auto fleet will almost certainly change and will look different from today's fleet, in terms of its energy sources and perhaps its engines. Certainly cars will be more efficient. New automobile fuel efficiency standards, passed at the end of December 2007, represent the first mandated increase in thirty-two years. The original fuel efficiency standards in 1975 were one of the two most important energy policy decisions in the 1970s (the other being the approval of the trans-Alaskan oil pipeline). These new standards will likely have similar impact. But what will be the changes? What kind of breakthroughs lie ahead for biofuels beyond corn-based ethanol? One way or the other, there will be more electricity in auto transportation. Hybrids will gain market share. Will plug-in hybrids mean that the electric power industry will be fueling some part of the auto fleet? Will natural gas become a significant motor fuel?

The dramatic changes in world oil are inevitably leading to a renewed focus on the perennial question of energy security. World War I and World War II had so starkly demonstrated the strategic importance of energy, particularly oil. But, as described in these pages, the present international system for energy security emerged only in the 1970s around the International Energy Agency and has evolved in the decades since. But much has changed in recent years. The major new consumers, China and India, need to be brought into the international energy security system, and that will require greater confidence and communication between them and the traditional importing countries. At the same time, there is an urgent need to address the physical security of energy infrastructure -- pipelines, power plants, and transmission lines -- and the supply chains that carry oil and natural gas from wellheads in the Persian Gulf, West Africa, Central Asia, and other parts of the world, to consumers. The integration of China and India and the focus on infrastructure are both essential for energy security in the twenty-first century.

Greater efficiency in the use of oil and other energy sources is emerging as a major and common policy objective in countries around the world. The industrial world is twice as energy efficient as it was in the 1970s. The potential for future efficiency is still very large. And yet it seems likely that a growing world economy, with rising incomes and increasing population, will require more oil -- perhaps 40 percent or more over the next quarter century, at least according to some estimates. Perhaps innovation will lower that number. The answers depend upon policy and markets and on technology and the scale and character of research and development.

And yet for several decades to come -- whether the price is high or low or somewhere in between -- oil will be a central factor in world politics and the global economy, in the global calculus of power, and in how people live their lives. And that is why this story provides a framework for the issues we face today and why, hopefully, it helps shed much-needed light on the critical choices we face and on the opportunities, risks -- and surely the surprises -- that lie ahead. As such,The Prizeis not only a history of the last 150 years. It is also a starting point for understanding how energy will shape the world of tomorrow.

Epilogue copyright © 2008 by Daniel Yergin

Excerpted from The Prize: The Epic Quest for Oil, Money and Power by Daniel Yergin