A Brief History of Oil Pt 2: From the Silliman to the Crazy Colonel

This is a continuation of a series of essays on the development of the oil industry. 

The group
settled on Edwin L Drake (E.L. Drake to his friends). A former railway
conductor, Drake had absolutely no experience in drilling, oil, or anything even
peripherally involved with Bissell and cohorts’ project. However, he was
unemployed, looking for work, and nuts enough to do the job, which were enough
qualifications given the circumstances.

I want to
take a moment here to stress just how outlandish Bissell et al’s drilling plans
were. Mankind had known that oil could burn for millennia (the Greeks were
pouring burning asphalt on their enemies as early as the Trojan siege).
Moreover, the concept of burning oil as a light source was not totally unprecedented:
several Eastern European countries were already doing this by the time Bissell
et al decided to give it a whirl; indeed, European-style lamps capable of
burning oil-based kerosene were sold in the US before Bissell et all even began their venture.

However, the
notion of drilling for oil, with the
hopes of producing vast quantities of it, was completely non-existent and
considered totally, and I mean TOTALLY insane.

Indeed,
James Townsend, President of New Haven Bank and partner in Bissell’s venture
was repeatedly told he was insane for getting involved in the venture, right to
his face.

This
prejudice was both a psychological AND literal obstacle to the project’s
success. E.L. Drake, who was dispatched by Bissell and Townsend to start
drilling in Titusville, Pennsylvania (using the fake moniker “Colonel” which
Bissell created to make Drake sound important), found it almost impossible to
begin drilling due to the simple fact that every driller in town thought he was
a lunatic and wanted nothing to do with him.

Insane or
not, Drake started drilling in 1859 with the help of a local blacksmith who
built drills (no driller would actually work for Drake) and his (the
blacksmith’s) son. The project took much longer (18+ months) and cost much more
than Bissell and his investors hoped. If not for an emergency infusion of
capital from Townsend, the “insane” banker, the project would have closed up in
1858. However, even Townsend’s $1,000 (roughly $25K in today’s money) only
added another 12 months to the project.

In fact,
Drake’s assistants actually struck oil on a Sunday, two days before a letter
from Bissell arrived telling him to close down the operation and sell the tools
in a desperate attempt to recoup some of the losses. On Saturday August 27
1859, the oil well hit something and closed down for the day. On Sunday,
Drake’s assistants returned to the well to discover oil seeping upwards. And by
Monday, when Drake opened the letter from Bissell, the well had already
produced enough black gold to fill every container his assistants could find.

And thus,
oil’s ascent as the dominant economic force in the world was funded by a lawyer
and banker, given scientific credibility by a Silliman, and put into action by
an “insane” fraud.

Rags, Then Riches, Then Rags Again All in One Year

Drilling for
oil became a credible prospect with Drake’s success on August 27, 1859. Yergin,
in The Prize, notes that by 1860
annual oil production in Western Pennsylvania (the region in which Drake had
first drilled) stood at 450,000 barrels. Two years later it was three million
barrels. The first boom had begun.

Entire towns
exploded and collapsed based on where oil was discovered. One area only 15
miles from Titusville, Pennsylvania (where Drake first discovered oil) went
from being unnoticeable on the map to a booming metropolis of 15,000 people and
back again in one years’ time (the fifty hotels and other businesses that
sprang up in that time were all gone within 24 months).  Parcels of land went from a few dollars
in value to $2 million and back again in less than a decade.

The
speculation was completely out of control. Yergin notes that due to demand, at
one point whiskey barrels cost twice as much the oil they contained. Similarly,
before the introduction of pipelines to the oil industry, the cost of
transporting a barrel of oil from a well through the muddy country roads to the
railroad via horse carriage was greater
than the cost of shipping the same barrel via train from Philadelphia to New
York.

However,
amidst this chaos, order began to appear. Oil began trading on informal
exchanges (essentially hotels and railroad stations where representatives from
various wells and refineries met to trade). Yergin points out that this marked
the beginning of oil speculation as an investment strategy: oil was traded on
“spot” prices (meaning immediate delivery), “regular” prices (meaning the deal
must be closed within 10 days), and “futures” (meaning a set amount of oil
would be bought or sold at a set price at a set date in the future. This final
transaction marked the beginning of oil futures trading in which investors
traded oil without ever intending to actually own the stuff.

However,
while oil trading began to form some semblance of order, the refining and
production aspect of the oil business remained largely a chaotic mess. This
messiness resulted in many problems. Some of them were personal: oil quality
varied from region to region and bad oil could explode when used in lamps
(5,000 to 6,000 deaths were annually caused by this in the 1870s).

On a more
social level, oil discoveries transformed towns into booming messes. Every new
discovery was met with a rush of speculators flocking to the area along with
all of the social “issues” surrounding greed, avarice, and fast money.  It also meant total destruction of the
area’s roads, as the massive influx of horse carriages transformed the roadways
into muddy messes. 

Other
oil-related problems were economic in nature.  Dominated by the “rule of capture” (basically whoever
extracts the oil owns it, regardless of whether the deposit is also under
someone else’s land), oil producers focused on producing oil as quickly as possible. 

This, in
turn, resulted in violent swings in the price of oil as supplies hit the market
or disappeared depending on when a new well struck black gold. Indeed, between
January 1861 and September 1863, the price of oil went from $10 a barrel to $0.50,
to $0.10, then $4 and back up $7.25. Talk about volatility.

One man
brought order to this chaos, systematically organizing the oil industry over
the course of 25 years. At the age of 26, he took over his first oil refinery.
By the time he retired from business at age 57, he’d not only completely
revolutionized the oil industry, he’d actually transformed the US corporate
landscape, forever changing the way people structured and managed their
businesses.

During the
30 years in between he amassed a fortune equal to $192 billion in today’s
dollars, making him the first billionaire and the richest American together.

I am, of
course, referring to John D. Rockefeller.

More to come
in the third and final article on the history of the oil industry in the US.

Good
Investing!

Graham
Summers

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Comments

[AnAnonymous]

One very learning part in the oil story:

as retold in this series, one group developped oil drilling (based on a technology that was not developped for that primarly)

In the same years, people started to question the idea of coupling the growth of an economy to a finite resource like coal.

And  another guy developped the device that would turn petroleum oil into work, the combustion engine.

None knew of each other. There were no concerted efforts.

A vital point as technologists rejoice over stating that technology will unlock every stalemate.

But in the oil story, there were only coincidences. Scientific efforts ( based on systemics brought by the scientific method)  to outcompete oil have so far failed. Usually very hard to beat coincidences. And relying on the expectations that coincidences are destined to happen again and again is ludicrous.

[Surly1]

I remember touring Pithole, PA (the town near Titusville that you reference) as a child. It was billed on the maps as a "ghost town," and I was disappointed to not find any old buildings or saloons (my frame of reference for "ghost town" having been fromed by 50s- and 60s-era westerns.) I brought back a souvenir bottle of Pennsylvania crude which I kept for years.

Great series, thanks.

[Aristarchan]

Just another aside...another place that is interesting per the oil field is down around Zapata, Texas, close to lake Falcon. Texaco had a huge lease in the area, and for years used it to allow geologists and petroleum engineers to experiment with new ways to produce, and free up more oil from the petroleum bearing strata. The problem with the oil down there is it is very heavy crude...almost like axle grease, so it does not flow readily from the ground into a production casing. I had the privilege of touring the place with a Tenneco Executive in the early 1980's, and the acreage was infested with relics of old machines that young engineers had used to try and produce the heavy crude. They tried steam, fracking, even fire...one engineer managed to set a section of the oil sand on fire, and since there were so many wells dotting the place (over 6,000) the fire simmered for years, seemingly drawing oxygen from the open holes. Another engineer rigged up a pulley in the bottom of a well with and endless rope than ran slowly, with a scrapper on the top to scrape the oil  from the rope and into a buried tank. That system was still working when I saw it. Oil could be found as shallow as 30 ft. in some locales...and in places, seeped from the earth. A very interesting place.

[Aristarchan]

Nice series. I was raise up close to a town Called Sipe Springs, Texas, which back in 1918 had an oil boom that grew the town from a population of 130 to almost 10,000 in less than a year. The place had an opera house and a professional baseball team. I have seen many old pictures of the place, and wood columned derricks were so close together in places the legs were anchored together, and throughout the derricks were hundreds of tents with families living in them. The oil was shallow - most of it less than 200 ft. deep, and some of it as shallow as 60 feet. By 1921 the boom was over, and the place had a population of a little over 500 by 1924. These day nothing is there except ruins, a few ranchers and a ton of artifacts from the old days either buried or laying on the ground. The methods of drilling back in the day caused the shallow groundwater to become contaminated with oil and salt water, so the peanut and sugar cane farmers left. Interestingly, during the late 1970's/early 1980's oil boom, the place had a mild resurgence, with speculators drilling shallow wells that would produce a 1/4 of a barrel per day...but the price of oil was so high, and the cost of drilling that shallow so cheap, that money could be made. Oddly enough, one problem the drillers ran into was after they spudded in, they would often hit the remains of the one of the thickly infested old wells. Another odd fact, in the early eighties, Sipe Springs was the site of a prototype oil mine, where a large rig drilled a large (12' diameter) hole down to the oil sand, then using a horizontal drilling machine designed to vent methane from coal seams, they drilled 36 radial holes out about 600 ft. The technology was British...so a lot of funny accents were running around Sipe Springs for a while.

Thanks for bringing back these old memories.

[SamuelMaverick]

This series you are doing is a fun read, thank you.