John D. Rockefeller and the Age of Oil
IF WE ARE reaching the Peak Oil phase of the Age of Oil, perhaps it is useful to return to its origins to understand how it all began. So in a recent article in Whiskey & Gunpowder, I discussed Col. Edwin Drake and his role in ushering onto the world stage the Age of Oil. After examining some aspects of Col. Drake’s efforts to put down an oil well at Titusville, Pa., in 1859, I asked why do some things happen the way that they do? What is it that makes history? In particular, what is it that brought mankind into the Age of Oil?
People knew about oil long before Col. Drake ever set foot near Oil Creek, in Venango County, Pa. For many centuries, people had dug holes in the ground in search of oil. People knew the rudiments of making a hole in the ground, and there were other people at about the same time, in what is now West Virginia and southern Ontario, moiling for oil in the rock formations of the Earth. But Col. Drake’s well is the one that gets much of the credit for bringing in, if not inaugurating, the Petroleum Age. Why is that?
The U.S. Civil War and Its Oil Boom
In previous articles, I also discussed how the U.S. Civil War was a key element in the creation of the world’s first oil boom. The federal spending boom between 1861-1865 sparked the classic wartime phenomenon of fiat currency flooding the national economy. Many of the Union’s greenback paper dollars found their way into speculation on oil leases, and then into the capital equipment and labor necessary to develop those leases. Had there been no U.S. Civil War, one can only wonder if there would have been the Pennsylvania oil boom of the 1860s, or the resultant Age of Oil. Where would the money have come from to pay for it?
In addition to speculation on oil leases, much of the federal spending for the Civil War wound up in the pockets of New York bankers and Pittsburgh industrialists. New York was where the biggest banks were located. Pittsburgh hosted the bulk of the nation’s nascent iron industry. In addition to equipping and provisioning the Union Army to fight a war, this mixture of New York capital and Pittsburgh industry became focused upon the oil-bearing formations of northwest Pennsylvania.
The marketplace had evolved to where there was demand for oil and oil products. That is, oil was no longer just a humble patent medicine to be consumed in small spoonfuls. By the early 1860s, there was industrial demand for oil, for purposes of lubrication and illumination in a world in the throes of an Industrial Revolution, as well as growing consumer demand. There was a scientific-based use and application for the substance, due to contemporaneous developments in the field of chemistry. And of course, Col. Drake had come up with his novel means for extracting oil from the ground. The time was ripe.
Thus, the world’s first true oil boom occurred in the midst of the general Civil War. New York money flowed to the iron mills of Pittsburgh to purchase pipe and other equipment to install in the oil patches of Titusville. The foundries of Pittsburgh rolled tubular goods for the oil fields. The equipment shops of western Pennsylvania manufactured pumps and gear drives and sucker rods, all shipped up the Allegheny River and eventually to the workings along Oil Creek. The Civil War also created a vast class of itinerant laboring men, deserters from the armies of both sides, as well as draft dodgers, foreign immigrants, and freed slaves. Capital, equipment, and labor all came together.
Booms and Busts
And as the wells came in, an oil boom occurred in Pennsylvania in the early and mid-1860s. Oil derricks spread across the farms and fields of northwest Pennsylvania like mushrooms after a rainstorm. As is the case with most booms, oil production soared and prices soon crashed. In the early 1860s, the price of oil gyrated wildly, reaching a high of $20 per barrel in 1861 (equivalent to over $600 per barrel today) to a low of as little as 10 cents (about $3 in today’s devalued currency) within just a few months. When the price of oil crashed, investment waned for a time. But also in consequence of underinvestment, by 1864, the price of oil was again drifting upward toward a high of $13 per barrel. And by 1866, just a year after the Civil War ended, oil was selling for all of $1.65 per barrel.
Whatever its price, there was hardly anything to do with crude oil straight from the ground. Aside from the tiny market for patent medicine, you cannot drink oil. (It is poisonous. It will kill you.) Even the Pennsylvania grade of rock oil, which is a smooth green nectar that is among the finest earthly products in all of nature, required some sort of refining process. And by the early 1860s, people had been experimenting with just such processes for several decades. One of America’s earliest refiners was a man named Samuel Kier, who in 1847 established a primitive refinery in Pittsburgh, about two blocks from the office building in which I work as a lawyer and on occasion write Whiskey & Gunpowder articles.
Oil Boiling and Refining
At first, refiners simply boiled the oil and condensed the fractions, not unlike distilling whiskey or other fine moonshine. And people in western Pennsylvania, the location of the 1794 “Whiskey Rebellion” of early American history, knew a few things about distilling moonshine. (I mean real moonshine, the kind you drink, and not the stuff that politicians put out whenever they make a speech.)
Early oil refiners used color, smell, and even taste in order to decide which fractions of the boiled oil were suitable for lubrication, illumination, or other purposes. To be sure, they did not taste much of it, because the stuff they were brewing was and is toxic. The earliest refining processes were entirely haphazard, not to mention very dangerous.
There was one petroleum fraction called gasoline that was rather explosive, and it was initially simply discarded as too difficult to handle or use. But the kerosene was good for use in lamps, as long as there was not very much gasoline mixed in. (It makes you wonder if it was Mrs. O’Leary’s cow that kicked over the lantern and started the Chicago Fire or perhaps just some bad lamp oil?) There were lubricating fractions and waxes and white oils, the latter being the origin in 1872 of an everyday product still in use, called Vaseline. Add carbon black to it and you have a cosmetic product called Maybelline, still available at fine stores. And the heavy fractions at the end of the distillation process could be used for boiler fuel.
The economics of refining were quite good. In the mid-1860s, despite the demands for equipment to fight the Civil War, a modest-sized refinery could be constructed for the rather astonishingly low capital cost of about $15 per barrel, or about $450 per barrel in today’s funds. (And by way of comparison, a modern oil refinery typically costs in excess of $10,000 per barrel per day of capacity.) With the low initial capital costs, a refinery could recover its entire cost of capital in just a couple of runs of oil. Many a fine house in Oil City or Franklin, Pa., or Pittsburgh or Cleveland or New York was constructed with the profits from relatively small refining operations.
These early refinery operations were less costly to construct because they were far simpler than today’s industrial behemoths. There was a primitive firebox and entirely unexceptional boiler, coupled with various condensation pipes and gauges, all feeding into storage vats. So hundreds of refineries were constructed during the 1860s, some with a capacity of as little as five barrels per day. These contraptions sprang up all over oil country. Some of them were near the sources of production in the oil patch itself, and many more were sited along the transportation routes to Pittsburgh and Cleveland.
Why Pittsburgh and Cleveland? That is where the railroad connections were located. Pittsburgh was the major east-west hub of the mighty Pennsylvania Railroad, and Cleveland was where the New York Central and Erie railroads passed through. The bulk of the freight traffic on these lines was grain and manufactured goods. But once refined oil products came to be available, there were more than a few carloads of these novel substances heading in all directions. By the late 1860s, both Philadelphia and New York were major destination points for refined oil products. This was because about 70% of U.S. production of these refined products was exported to foreign markets.
The Man From Cleveland
Still, for all its success and spectacular growth, the oil business and associated refining operations were creatures of a rapid business cycle marked by boom and bust. The industry was economically irrational, which is another way of saying that, then as now, it offered opportunities for anyone who had an eye for efficiency and consolidation. Something had to happen, and something did happen in the form of a man who desired and acted to bring some semblance of order to a chaotic scene.
That “something” was a businessman from Cleveland, Ohio, named John D. Rockefeller. Rockefeller conceived a method of bringing standardization to the oil industry, and, eventually, he did exactly that.
By the late 1860s, a number of refiners had started to figure out what was going on within the boilers. Using accepted scientific methods, they came to understand heating cycles and the nature of the fractionating process. Mechanical engineers designed improved and substantially larger systems of refining stacks, which operated at higher temperatures and pressures with less waste of energy input and product coming out. Engineers figured out how to use catalysts and additives to improve the yields and product qualities. Even the mundane aspects of operating a refinery, such as chipping coke and cleaning sludge, came under scrutiny, which led to dramatic improvements in efficiency.
During this time, Cleveland’s Mr. Rockefeller began to buy up refineries. After each purchase, he would keep on running the more efficient plants and simply shut down the less efficient operations. With every refinery he purchased, he was gaining more control over a chaotic situation.
Rockefeller was a consummate promoter of refined products, and among the first businessmen ever to promote a so-called “brand.” In order to reassure his customers that his product was what was advertised, in 1870, he went so far as to rename his operations the “Standard Oil Co.” In other words, if you purchased kerosene lamp oil, it would be a “standard” product, no matter which refinery was the source, and, more importantly to the end user, not adulterated with explosive gasoline. There is a consensus among business historians that Standard Oil’s lamp kerosene was the first truly global consumer product.
By the early 1870s, Rockefeller was certain that the refining business was on the verge of a massive shakeout. Thus, he was consumed with a focus on efficiency in his operations. Rockefeller missed no chance to reduce costs, eliminate waste, and sell, sell, sell. Every last drop of a barrel of refined oil was for sale, in some form, at some price.
The profit margin was a key focus as well for Rockefeller. Believing that his suppliers were charging too much (don’t they always?), Rockefeller purchased his own pipe and machinery. He built his own barrel plants and bought his own rail cars. When he saw the opportunity to acquire a supplier and “capture” the profit margin, upstream or downstream, he acted.
Rockefeller’s Standard Oil Co. acquired pipeline systems, storage tanks, railroad loading facilities, and wholesale shipping and distribution companies. Standard Oil declined to enter into the oil drilling business, because drilling wells was too risky in Rockefeller’s view. But Standard was first in line to purchase the oil at the wellhead, transport it by rail or pipeline to a storage facility, then to a refinery, then to a packaging facility, and then to wholesalers and retailers around the world.
Eventually, Standard Oil found itself in a position to balance oil production in the field against its own refinery output. In a remarkable evolution of events, Standard was able to control most of its costs from wellhead to the final consumer point of purchase. Standard Oil simply accumulated economic efficiencies from the wellheads of the oil patch to the last ring of the cash register, and, in turn, became an almost impregnable business presence.
Within a period of about a single decade, between 1865-1875, John D. Rockefeller, the man from Cleveland, and his business associates at Standard Oil Co. literally created a global industry for refined petroleum products. In later years, some business historians and polemicists would call Rockefeller “ruthless” and other such names. But they did so in a world that was lit, lubricated, and powered by the Standard Oil business model.
It is not overstating the case to say that while Col. Edwin Drake ushered the industrial scale extraction of petroleum onto the stage of history with his efforts at Titusville, it was Rockefeller and Standard Oil Co. that invented the Age of Oil as we know it.
Products and Prisoners of History
Why do some things happen the way that they do? And what makes history? As I have written before, we are all both products and prisoners of history.
Think of Col. Drake and John D. Rockefeller in the context of Peak Oil. We are where we are, of course, living in a world where conventional oil production is peaking. Within the next few years, conventional oil production will go into absolute, irreversible decline. Should we somehow blame Drake and Rockefeller? Certainly, absent the efforts of Drake and Rockefeller at oil extraction and refining, this would be an entirely different world. Or would it? What if there had been no U.S. Civil War to serve as the source of funds for the initial oil boom? What then?
But still, keep on looking. Keep on asking. How did we get here? We need to know and to understand, because the next question is where do we go from here? What will life be like in a post-Peak Oil world, a world in which the production of conventional crude oil follows a pathway of irreversible decline? How does one begin to plan for it? Have we in essence “built the wrong world,” based on false assumptions? How does one just “unwind” the historical trends, if that is even possible? Is it too facile just to say that mankind will somehow “invent” another future? Yes, of course, the sun will surely rise tomorrow morning, as it has risen each morning for the past 4.5 billion years. But upon what sort of world will it shine?
Whatever you do, please do not lose sight of your fundamental assumptions. What is the aperture of your viewpoint? Is the energy future of mankind one of simply connecting the dots of the past 140 years and following the soaring curve ever upward? Or is the energy future of mankind one of looking at the past 5,000 years of recorded history, and wrestling with the uncomfortable notion that the human progress of the past 140 years has been an energy-consuming anomaly in the long-term trends of human life on Earth? At root, are you an optimist or a pessimist? Or are you some of both?
I wish I had the answers for you. Right now, as I sit here just down the street from the site of Mr. Samuel Kier’s pioneering oil-boiling refinery, all I can do is ask the questions.
Until we meet again…
Byron W. King
August 18, 2006