Category — Energy History/Development
[Yesterday (May 15) was the 100th anniversary of the U.S. Supreme Court decision [Standard Oil Co. of New Jersey v. United States finding John D. Rockefeller's company guilty of restraint of trade and monopolizing the petroleum industry. The court’s remedy was to affirm a lower court decree effectively dividing Standard Oil into several competing firmsdissolution of Standard Oil. This post, taken from Robert Bradley's Oil, Gas and Government: The U.S. Experience, summarizes the manifold contributions of John D. Rockefeller to a fledgling, powerhouse industry. Documentation for the points and quotations below can be found on pp. 1089–1094.], 221 U.S. 1 (1911)]
A resume of the contributions of Standard Oil prior to its court-ordered dissolution in 1911 offers an illuminating glimpse into entrepreneurship, the market process, and consumer service therein.
Rockefeller and the management team at Standard Oil can be credited with accelerating the maturation of the kerosene age in petroleum. Their entrance in the 1870s found an infant industry prone to cyclical growth, undercapitalization, and coordination problems. Explained Williamson and Daum:
Lack of balance between various segments of the industry appeared to be chronic; crude production, refinery capacity and throughput, and market demand were rarely in equilibrium. First, production would outrun throughput by refineries; the manufacturing capacity would exceed either current crude production or the rate at which refined products could be absorbed by the market. These more or less continuous maladjustments were reflected in wide fluctuations in prices of crude and refined products.
Within the free-market environment, company and industry problems invited profitable solutions, and Rockefeller proved to be the right man at the right place and time. Standard strategically bypassed the unstable exploration and production phase, where drilling was risky and production often exceeded storage and demand capabilities, and concentrated instead on the manufacturing phase. Demand for refined products was solid and growing, and the lure of a big strike would keep the drillers busy; Rockefeller’s plan was to concentrate in the middle with storage, transportation, and refining to lower cost and add value to the oil. The refining phase, in particular, was in need of great improvement. Summarized John McLaurin:
The first refineries were exceedingly primitive and their processes simple. Much of the crude was wasted in refining, a business not financially successful as a rule until 1872, notwithstanding the high prices obtained. Methods of manufacture and transportation were expensive and inadequate. The product was of poor quality, emitting smoke and unpleasant odor and liable to explode on the slightest provocation…. Railroad-rates were excessive and irregular…. The cost of transportation and packages had been important factors in crippling the industry.
Rockefeller clearly recognized the “manifold economies,” to borrow biographer Allen Nevin’s term, associated with large size. Contracting in bulk lowered input prices and transportation rates. Diverse plant locations reduced the business risks of fire and explosion. Improvements in distillation technology steadily lowered unit costs. Integration into complementary phases (barrel making, pipelines, wagon production, storage, loading facilities, marketing) internalized profits and trimmed costs. By-products that other refiners treated as waste Rockefeller found uses for. Literally hundreds of by-products were distilled from each barrel of oil. Opportunities for efficient operation were discovered and implemented that set industry standards in favor of the consumer. [Read more →]
May 16, 2011 2 Comments
Energy at the Speed of Thought (Part 4: Free-Market Alternatives in Illumination and Transportation Energy)
[Editors note: This is the final installment of Alex Epstein's four-part exploration of innovation and creative destruction of the early oil market. Read Part 3 here. References are at the bottom. This post was originally published in The Objective Standard.]
John D. Rockefeller’s improvements, which can be enumerated almost indefinitely, helped lower the prevailing per-gallon price of kerosene from 58 cents in 1865, to 26 cents in 1870—a price at which most of his competitors could not afford to stay in business—to 8 cents in 1880. These incredible prices represented the continuous breakthroughs that the Rockefeller-led industry was making. Every five years marked another period of dramatic progress—whether through long-distance pipelines that eased distribution or through advances in refining that made use of vast deposits of previously unrefinable oil. Oil’s potential was so staggering that no alternative was necessary. But then someone conceived of one: the electric lightbulb.
Actually, many men had conceived of electric lightbulbs in one form or another; but Thomas Edison, beginning in the late 1870s, was the first to successfully develop one that was practical and potentially profitable. Edison’s lightbulb lasted hundreds of hours, and was conceived as part of a practical distribution network—the Edison system, the first electrical utility and distribution grid. As wonderful as kerosene was, it generated heat and soot and odor and smoke and had the potential to explode; lightbulbs did not. Thus, as soon as Edison’s lightbulb was announced, the stock prices of publicly traded oil refiners plummeted. [Read more →]
December 23, 2010 7 Comments
[Editors note: This is part 3 of 4 in Alex Epstein's exploration of innovation and creative destruction of the early oil market. Read Part 2 here. References are at the bottom. This post was originally published in The Objective Standard.]
George Bissell was the last person anyone would have bet on to change the course of industrial history. Yet this young lawyer and modest entrepreneur began to do just that in 1854 when he traveled to his alma mater, Dartmouth College, in search of investors for a venture in pavement and railway materials. 26 While visiting a friend, he noticed a bottle of Seneca Oil—petroleum—which at that time was sold as medicine. People had known of petroleum for thousands of years, but thought it existed only in small quantities. This particular bottle came from an oil spring on the land of physician Dr. Francis Beattie Brewer in Titusville, Pennsylvania, which was lumber country.
At some point during or soon after the encounter, Bissell became obsessed with petroleum, and thought that he could make a great business selling it as an illuminant if, first, it could be refined to produce a high quality illuminant, and, second, it existed in substantial quantities. Few had considered the first possibility, and most would have thought the second out of the question. The small oil springs or seeps men had observed throughout history were thought to be the mere “drippings” of coal, necessarily tiny in quantity relative to their source.
But Bissell needed no one’s approval or agreement—except that of the handful of initial investors he would need to persuade to finance his idea. The most important of these was Brewer, who sold him one hundred acres of property in exchange for $5,000 in stock in Bissell’s newly formed Pennsylvania Rock Oil Company of New York. [Read more →]
December 22, 2010 3 Comments
Energy at the Speed of Thought (Part 2: Individual Planning in the Pre-Petroleum Illumination Market)
[Editors note: This is part 2 of 4 in Alex Epstein's exploration of innovation and creative destruction of the early oil market. Read Part 1 here. References are at the bottom. This post was originally published in The Objective Standard.]
Today, we know oil primarily as a source of energy for transportation. But oil first rose to prominence as a form of energy for a different purpose: illumination.
For millennia, men had limited success overcoming the darkness of the night with man-made light. As a result, the day span for most was limited to the number of hours during which the sun shone—often fewer than ten in the winter. Even as late as the early 1800s, the quality and availability of artificial light was little better than it had been in Greek and Roman times—which is to say that men could choose between various grades of expensive lamp oils or candles made from animal fats. 16 But all of this began to change in the 1820s. Americans found that lighting their homes was becoming increasingly affordable—so much so that by the mid-1860s, even poor, rural Americans could afford to brighten their homes, and therefore their lives, at night, adding hours of life to their every day. 17
What made the difference? Individual freedom, which liberated individual ingenuity.
The Enlightenment and its apex, the founding of the United States of America, marked the establishment of an unprecedented form of government, one established explicitly on the principle of individual rights. According to this principle, each individual has a right to live his own life solely according to the guidance of his own mind—including the crucial right to earn, acquire, use, and dispose of the physical property, the wealth, on which his survival depends. [Read more →]
December 21, 2010 1 Comment
[Editors note: This four-part post examines the innovation and creative destruction of the early oil market. It was originally published by The Objective Standard.]
The most important and most overlooked energy issue today is the growing statist threat to global energy supply.
There is no substitute for available, affordable, and reliable supply. Cheap, industrial-scale energy is essential to building, transporting, and operating everything we use, from refrigerators to Internet server farms to hospitals. It is desperately needed in the undeveloped world, where 1.6 billion people lack electricity, which contributes to untold suffering and death. And it is needed in ever-greater, more-affordable quantities in the industrialized world: Energy usage and standard of living are directly correlated.1
Every dollar added to the cost of energy is a dollar added to the cost of life. And if something does not change soon in the energy markets, the cost of life will become a lot higher. As demand increases in the newly industrializing world, led by China and India, 2 supply stagnates 3—meaning rising prices as far as the eye can see.
What is the solution?
We just need the right government “energy plan,” leading politicians, intellectuals, and businessmen tell us. Of course “planners” such as Barack Obama, John McCain, Al Gore, Thomas L. Friedman, T. Boone Pickens, and countless others favor different plans with different permutations and combinations of their favorite energy sources (solar, wind, biomass, ethanol, geothermal, occasionally nuclear and natural gas) and distribution networks (from decentralized home solar generators to a national centralized so-called smart grid). But each agrees that there must be a plan—that the government must lead the energy industry using its power to subsidize, mandate, inhibit, and prohibit. And each claims that his plan will lead to technological breakthroughs, more plentiful energy, and therefore a higher standard of living. [Read more →]
December 20, 2010 14 Comments
Many in the energy business, whether or not they support President Obama’s positions on energy and the environment, are likely to think, “Look, the US is a big ship. It cannot be turned around in a couple of years, and even if they tried, you can right the course at the ballot box.”
Actually, you can’t. The United States is still a nation of laws, and without strong political support, the acts of one administration cannot be easily reversed or undone by the next.
But there is more to the story than simple inertia and political head-counts. Each new administration enters with an agenda of positive goals. Spending time and political capital on your predecessor’s agenda can often find its way to the bottom of the to-do list. Moreover, a new president has only a limited circle of advisers. They cannot know everything about what the last guys did (Hayek’s revenge). [Read more →]
March 25, 2009 6 Comments