[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.
Enlightenment America, and to a large extent Enlightenment Europe, gave men unprecedented freedom in the intellectual and economic realms. Intellectually, individuals were free to experiment and theorize without restrictions by the state. This made possible an unprecedented expansion in scientific inquiry—including the development by Joseph Priestly and Antoine Lavoisier of modern chemistry, critical to future improvements in illumination. 18 Economically, this freedom enabled individuals to put scientific discoveries and methods into wealth-creating practice, harnessing the world around them in new, profitable ways—from textile manufacturing to steelmaking to coal-fired steam engines to illuminants.
There had always been a strong desire for illumination, and therefore a large potential market for anyone who could deliver it affordably—but no one had been able to actualize this potential. In the 1820s, however, new scientists and entrepreneurs entered the field with new knowledge and methods that would enable them to harness nature efficiently to create better, cheaper illuminants at a profit. Contrary to those who believe that the government is necessary to stimulate, invest in, or plan the development of new energy sources, history shows us that all that is required is an opportunity to profit.
That said, profiting in the illumination industry was no easy task. The entrenched, animal-based illuminants of the time, whatever their shortcomings, had long histories, good reputations, refined production processes, established transportation networks and marketing channels, and a large user base who had invested in the requisite lamps. In other words, animal-based illuminants were practical. For a new illumination venture to be profitable, it would have to create more value (as judged by its customers) than it consumed. A successful alternative would not only have to be a theoretical source of energy, or even work better in the laboratory; it would have to be produced, refined, transported, and marketed efficiently—or it would be worthless. Unlike today, no government bureaucrats were writing big checks for snazzy, speculative PowerPoint presentations or eye-popping statistics about the hypothetical potential of a given energy source. Thus, scientists and entrepreneurs developed illumination technologies with an eye toward creating real value on the market. They began exploring all manner of potential production materials—animal, vegetable, and mineral—and methods of production and distribution. Many of their attempts failed, such as forays into fish oils and certain plant oils that proved unprofitable for reasons such as unbearable smell, high cost of mass production, and low-quality light. 19 But, out of this torrent of entrepreneurial exploration and experimentation, three illumination breakthroughs emerged.
One, called camphene, came from the work of the enterprising scientist Isaiah Jennings, who experimented with turpentine. If turpentine could create a quality illuminant, he believed, the product held tremendous commercial potential as the lowest-cost illuminant on the market: Unlike animal fat, turpentine was neither in demand as a food product nor as a lubricant. Jennings was successful in the lab, and in 1830, he took out a patent for the process of refining turpentine into camphene. The process he patented was a form of distillation—boiling at different temperatures in order to separate different components—a procedure that is vital to the energy industry to this day.
Before camphene could succeed on the market, Jennings and others had to solve numerous practical problems. For example, they discovered that camphene posed the threat of explosion when used in a standard (animal) oil lamp. The initial solution was to design new lamps specifically for use with camphene—but this solution was inadequate because the money saved using camphene would barely defray the expense of a new lamp. So, producers devised methods that enabled customers to inexpensively modify their existing lamps to be camphene-safe. The payoff: In the 1840s, camphene was the leading lamp oil, while use of animal oils, the higher-cost product, as illuminants declined in favor of their use as lubricants. Camphene was the cheapest source of light to date, creating many new customers who were grateful for its “remarkable intensity and high lighting power.” 20
Second, whereas Jennings had focused on developing a brand-new source of illumination, another group of entrepreneurs—from, of all places, the Cincinnati hog industry—saw an opportunity to profitably improve the quality of light generated from animal lard, an already widely used source of illumination. At the time, the premium illuminant in the market was sperm whale oil, renowned for yielding a safe, consistent, beautiful light—at prices only the wealthy could afford. In the 1830s, soap makers within the hog industry set out to make traditional lard as useful for illumination as the much scarcer sperm whale oil. They devised a method of heating lard with soda alkali, which generated two desirable by-products that were as good as their sperm equivalents but less expensive: a new lard oil, dubbed stearin oil, for lamps and stearic acid for candles. This method, combined with a solid business model employing Cincinnati’s feedstock of hogs, created a booming industry that sold 2 million pounds of stearin products annually. The price of stearin oil was one third less than that of sperm whale oil, making premium light available to many more Americans. 21
Thus camphene and stearin became leaders in the market for lamps and candles—both portable sources ofillumination. The third and final new form of illumination that emerged in the early 1800s was a bright, high-quality source of illumination delivered via fixed pipes to permanent light fixtures installed in homes and businesses. In the 17th century, scientists had discovered that coal, when heated to extremely high temperatures (around 1600 degrees), turns into a combustible gas that creates a bright light when brought to flame. In 1802, coal gas was used for the first time for commercial purposes in the famous factory of Boulton & Watt, near Birmingham, England. 22 Soon thereafter, U.S. entrepreneurs offered coal gas illumination to many industrial concerns—making possible a major extension of the productive day for businesses, and thus increasing productivity throughout American industry. Initially, the high cost of the pipes and fixtures required by gas lighting precluded its use in homes. But entrepreneurs devised more efficient methods of installing pipes in order to bring gas into urban homes, and soon city dwellers in Baltimore, Boston, and New York would get more useful hours out of their days. Once the infrastructure was in place, the light was often cheaper than sperm whale oil, and was reliable, safe, and convenient. As a result, during the 1830s and 1840s, the coal-gas industry grew at a phenomenal rate; new firms sprang up in Brooklyn, Bristol (Rhode Island), Louisville, New Orleans, Pittsburgh, and Philadelphia. 23
By the 1840s, after untold investing, risk-taking, thinking, experimentation, trial, error, failures, and success, coal gas, camphene, and stearin producers had proven their products to be the best, most practical illuminants of the time—and customers eagerly bought them so as to bring more light to their lives than ever before.
But this was only the beginning. Because the market was totally free, the new leaders could not be complacent; they could not prevent better ideas and plans from taking hold in the marketplace. Unlike the static industries fantasized by today’s “planners,” where some government-determined mix of technologies produces some static quantity deemed “the energy Americans need,” progress knew no ceiling. The market in the 19th century was a continuous process of improvement, which included a constant flow of newcomers who offered unexpected substitutes that could dramatically alter Americans’ idea of what was possible and therefore what was “needed.”
In the early 1850s, entrepreneurs caused just such a disruption with a now-forgotten product called coal oil. 24 Coal oil initially emerged in Europe, which at the time also enjoyed a great deal of economic freedom. Scientists and entrepreneurs in the field of illumination were particularly inclined to look for illuminants in coals and other minerals because of the relative scarcity of animal and vegetable fats, and correspondingly high prices for both. Beginning with the French chemist A. F. Selligue, and continuing with the British entrepreneur James Young, Europeans made great strides in distilling coal at low heat (as against the high heat used to create coal gas) to liquefy it, and then distilling it (as Jennings had distilled turpentine into camphene) to make lamp oil and lubricants that were just as good as those from animal sources. Coal was plentiful, easy to extract in large quantities, and therefore cheap. The primary use of coal oil in Europe, however, was as a lubricant. In North America, the primary use would be as an illuminant.
Beginning in the 1840s, a Canadian physician named Abraham Gesner, inspired by the Europeans, conducted experiments with coal and was able to distill a quantity of illuminating oil therefrom. Gesner conceived a business plan (like so many scientists of the day, he was entrepreneurial), and teamed with a businessman named Thomas Cochrane to purchase an Alberta mining property from which he could extract a form of coal (asphaltum), refine it at high quality, and sell it below the going price for camphene.
But in 1852 the project was aborted—not because the owners lost the means or will to see it through, but because the Canadian government forbade it. The government denied that the subsurface minerals belonged to those who harnessed their value; it held that they were owned by the Crown, which did not approve of this particular use.
Gesner’s experience in Canada highlights a vital precondition of the rapid development of the American illumination energy industry: the security of property rights. All of the industries had been free to acquire and develop the physical land and materials necessary to create the technologies, make the products, and bring them to market based on the entrepreneurs’ best judgment. They had been free to cut down trees for camphene, raise hogs for stearin, and mine coal and build piping for gas lighting, so long as they were using honestly acquired property. And this freedom was recognized as a right, which governments were forbidden to abrogate in the name of some “higher” cause, be it the Crown or “the people” or the snail darter or protests by those who say, “Not in my backyard” about other people’s property. Because property rights were recognized, nothing stopped them from acting on their productive ideas. Had property rights not been recognized, all their brilliant ideas would have been like Gesner’s under Canadian rule: worthless.
Not surprisingly, Gesner moved to the United States. He set up a firm, the New York Kerosene Company, whose coal-oil illuminant, kerosene, was safer and 15 percent less expensive than camphene, more than 50 percent less expensive than coal gas, 75 percent less expensive than lard oil, and 86 percent less expensive than sperm whale oil. Unfortunately, this was not enough for Gesner to succeed. His product suffered from many problems, such as low yields and bad odor, and was not profitable. However, his limited successes had demonstrated that coal’s abundance and ease of refining made it potentially superior to animal and vegetable sources.
That potential was fully actualized by a businessman named Samuel Downer and his highly competent technical partners, Joshua Merrill and Luther Atwood. Downer had devoted an existing company to harnessing a product called “coup oil,” the properties of which rendered it uncompetitive with other oils. Recognizing the hopelessness of coup oil, Downer set his sights on coal-oil kerosene. Downer’s firm made major advances in refining technology, including the discovery of a more efficient means of treating refined oil with sulfuric acid, and of a process called “cracking”—also known as “destructive distillation”—which uses high heat to break down larger molecules into smaller ones, yielding higher amounts of the desired substance, in this case kerosene. (Unbeknownst to all involved, these discoveries would be vital to the undreamed of petroleum industry, which would emerge in the near future.) By 1859, after much effort went into developing effective refining processes and an efficient business model, Downer’s firm was able to make large profits by selling kerosene at $1.35 a gallon—a price that enabled more and more Americans to light their houses more of the time. Others quickly followed suit, and by decade’s end, businessmen had started major coal-oil refineries in Kentucky, Cincinnati, and Pittsburgh. The industry had attracted millions in investment by 1860, and was generating revenues of $5 million a year via coal oil—a growing competitor to coal gas, which was generating revenues of $17 million a year and had attracted $56 million (more than $1 billion in today’s dollars) in investment. 25
As the 1850s drew to a close, coal oil and coal gas were the two leading illuminants. These new technologies brightened the world for Americans and, had the evolution of illumination innovation ended here, most Americans of the time would have died content. Their quality of life had improved dramatically under this energy revolution—indeed, so dramatically that, were a comparable improvement to occur today, it would dwarf even the most extravagant fantasies of today’s central planners. This points to a crucial fact that central planners cannot, do not, or will not understand: The source of an industry’s progress is a free market—a market with real economic planning, profit-driven individual planning.
The revolution in illumination was a process of thousands of entrepreneurs, scientists, inventors, and laborers using their best judgment to conceive and execute plans to make profits—that is, to create the most valuable illuminant at the lowest cost—with the best plans continually winning out and raising the bar. As a result, the state of the market as a whole reflected the best discoveries and creativity of thousands of minds—a hyperintelligent integration of individual thinking that no single mind, no matter how brilliant, could have foreseen or directed.
Who knew in 1820 that, of all the substances surrounding man, coal—given its physical properties, natural quantities, and costs of extraction and production—would be the best source for inexpensive illumination? Who knew all the thousands of minute, efficiency-producing details that would be reflected in the operations of the Samuel Downer Company—operations developed both by the company and by decades of trial and error on the market? Consider, then, what it would have meant for an Al Gore or Thomas Friedman or Barack Obama to “plan” the illumination energy market. It would have meant pretending to know the best technologies and most efficient ways of harnessing them and then imposing a “plan.” And, given that neither Gore nor Friedman nor anyone else could possibly possess all the knowledge necessary to devise a workable plan, what would their “plan” consist of? It would consist of what all central planners’ “plans” consist of: prohibition, wealth transfers, and dictates from ignorance. Depending on when the “planners” began their meddling and who was whispering in their ear, they might subsidize tallow candles or camphene, thereby pricing better alternatives out of the market or limiting lighting choices to explosive lamps.
Thankfully, there was no such “planner”—there were only free individuals seeking profit and free individuals seeking the best products for their money. That freedom enabled the greatest “eureka” of them all—from an unlikely source.
[editor’s note: for parts 2-4, citations are colored and referenced at the bottom]
Alex Epstein is a fellow at the Ayn Rand Center for Individual Rights, focusing on energy issues. He is the author of numerous articles on oil and energy, which have appeared in such publications as the Wall Street Journal, Forbes, Investor’s Business Daily, and FOX News. Epstein is a frequent speaker at universities around the country, a frequent guest on nationally syndicated radio programs, and a guest panelist on the popular “Front Page” show on PJTV.com
16 Harold F. Williamson and Arnold R. Daum, The American Petroleum Industry 1859–1899: The Age of Illumination (Evanston, IL: Northwestern University, 1963), p. 29.
17 Ibid., p. 320.
18 Ibid., p. 28.
19 M. Luckiesh, Artificial Light (New York: The Century Co., 1920), pp. 51–56.
20 Williamson and Daum, The American Petroleum Industry, pp. 33–34.
21 Ibid., pp. 34–36.
22 Ibid., p. 32.
23 Ibid., pp. 32, 38–42.
24 This discussion is based on Williamson and Daum, The American Petroleum Industry, pp. 43–60.
25 Calculated using GDP Deflator and CPI, http://www.measuringworth.com/.
Aside from profit, another important piece to innovation is trial and error. We’ve become accustomed to the first mover advantage garnered by companies like Amazon. In the past the first movers, i.e. the pioneers, often had arrows in the back. It was the subsequent innovators who were able to build on someone else’s failure or take the idea in a slightly different but more successful direction.
Imagine a government program subject to market discipline!