[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.
Oil, it appeared, was no longer the future of illumination energy; electricity was. This fact, and the competitive pressures it placed on the oil industry, prompted entrepreneurs to figure out whether their product could enjoy comparable consumer demand in any other sphere, inside or outside of the energy industry. They worked to expand the market for oil as a lubricant and as a fuel for railroads and tankers. But the fate of the industry would hinge on the rise of the automobile in the 1890s. 41
It is little known that most builders of automobiles did not intend them to run on gasoline. Given the growth and popularity of electricity at the time, many cars were designed to run on electric batteries, whereas other cars ran on steam or ethanol. Gasoline’s dominance was not a fait accompli.
If the market had not been free, the electric car would likely have been subsidized into victory, given the obsession with electricity at the time. But when the technologies were tested in an open market, oil/gasoline won out—because of the incredible efficiency of the Rockefeller-led industry coupled with gasoline’s energy density. Per unit of mass and volume, it could take a car farther than an electric battery or a pile of coal or a vat of ethanol (something that remains true to this day). Indeed, Thomas Edison himself explained this to Henry Ford, in a story told by electricity entrepreneur Samuel Insull.
“He asked me no end of details,” to use Mr. Ford’s own language, “and I sketched everything for him; for I have always found that I could convey an idea quicker by sketching than by just describing it.” When the conversation ended, Mr. Edison brought his fist down on the table with a bang, and said: “Young man, that’s the thing; you have it. Keep at it. Electric cars must keep near to power stations. The storage battery is too heavy. Steam cars won’t do, either, for they require a boiler and fire. Your car is self-contained—carries its own power plant—no fire, no boiler, no smoke and no steam. You have the thing. Keep at it.”. . . And this at a time when all the electrical engineers took it as an established fact that there could be nothing new and worthwhile that did not run by electricity. 42
By 1912, gasoline had become a staple of life—and was on the way to changing it even more than kerosene had. A trade journal from 1912, Gasoline—The Modern Necessity, read:
It seems almost unbelievable that there was once a time when the refiners and manufacturers of petroleum products concerned themselves seriously with finding a market for the higher distillates. At the present time it is the higher distillate known as gasoline that is giving not alone the refiners grave concern but modern civilization as well. Then it was how to find an adequate and profitable market for it; now it is how to meet the ever-increasing demand for it. 43
Oil was the ultimate alternative energy—first for illumination, then for locomotion. In a mere half century, oil went from being useless black goo to the chief energy source leading the illumination and mobilization of the world. Young couples filling up their automobiles in 1910 had nary a clue as to how much thought and knowledge went into their ability to power their horseless carriages so cheaply and safely. Nor did most appreciate that all of this depended on a political system in which the government’s recognition and protection of the right to property and contract enabled businessmen to develop the world around them, risk their time and money on any innovation they chose, and profit from the results.
If we compare today’s “planned” energy market to the rights-respecting energy market that brought about the emergence of oil, we can see in concrete fact the practicality of a genuinely free market.
Instead of protecting property rights and unleashing the producers of energy to discover the best forms of energy and determine how best to deploy them (which includes genuine privatization of the electricity grid and other transcontinental development), 44 our government randomly dictates what the future is to be. Today, we are told, as if it were written in the stars, that plug-in hybrids powered by solar and wind on a “smart grid” are the way to go—a claim that has no more validity than an 1860s claim that a network of wagon drivers should deliver coal oil nationwide.
What sources of energy are best pursued and how best to pursue them can be discovered only by millions of minds acting and interacting freely in the marketplace—where anyone with a better idea is free to prove it and unable to force others to fund his pursuit. When the government interferes in the marketplace, countless productive possibilities are precluded from coming into existence.
Today’s government as “energy planner” not only thwarts the market by coercively subsidizing the “right” energy technologies; it damages the market by opposing or even banningthe “wrong” energy technologies or business models. Today’s energy policy severely restricts the production of every single practical, scalable form of energy: coal, natural gas, oil, and, above all, nuclear.
Nuclear energy deserves special mention because it has tremendous proven potential, the result of its incredible energy density: more than one million times that of any fossil fuel—which, unlike oil, coal, or natural gas, has never been allowed to develop in anything resembling a free market. Thanks to environmentalist hysteria, this proven-safe source of energy has been virtually banned in the United States. And when nuclear plants have been permitted, construction costs and downtime losses have been multiplied many times over by multi-decade regulatory delays. Even in other countries, where nuclear power is much more welcome, it is under the yoke of governments and is therefore progressing at a fraction of its potential.
If the scientists, engineers, and businessmen in the nuclear power industry had been able to pursue their ideas and develop their products in a free market—as oilmen once were able to do—how much better would our lives be today? What further technologies would have blossomed from that fertile foundation? Would automobiles even be running on gasoline? Would coal be used for anything anymore? And if entrepreneurs with other, perhaps even better, energy ideas had been free to put them into practice as quickly as their talents would allow—just as their 19th-century forebears had—might we by now have realized the dream of supplanting nuclear fission with nuclear fusion, which many consider the holy grail of energy potential?
The fact is, we cannot even dream of what innovations would have developed or what torrents of energy would have been unleashed. As the history of the original alternative energy industry illustrates, no one can predict the revolutionary outcomes of a market process. Happily, however, with respect to the future, we can do better than dream: We can see for ourselves what kind of untapped energy potential exists, by learning from the 19th century. We can—and must—remove the political impediments to energy progress by limiting the government to the protection of rights. Then, we will witness something truly spectacular: energy at the speed of 21st-century thought.
[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
41 Discussion based on Harold F. Williamson, Ralph L. Andreano, Arnold R. Daum, and Gilbert C. Klose, The American Petroleum Industry, 1899–1959: The Age of Energy (Evanston, IL: Northwestern University Press, 1963), pp. 184–95.
42 Samuel Insull, The Memoirs of Samuel Insull (Polo, IL: Transportation Trails, 1934, 1992), pp. 142–43.
43 Williamson, Andreano, Daum, and Klose, The American Petroleum Industry, p. 195.
44 Raymond C. Niles, “Property Rights and the Electricity Grid,” The Objective Standard, Summer 2008.
Thank you very much for this series. Very useful insights and a reminder that we need to take the long view.
Do you have this in a single article format with references?
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Given the ultra-high energy density of nuclear fuel, I think it was inevitable that the government would get involved, rather than leave it to the free-market, since it wouldn’t want individuals to have the power (literally!) to challenge it.
I agree with the historical premise of this piece but I do not think we should overlook the potential negative impacts of scale. The author points to economies of scale allowing Rockefeller to substantially increase innovation and competiveness as his business grew. But the downside of the scaling of energy (or industrial for that matter) production is the impact it has on those that live near the facilities. There are obvious examples such as Chernobyl (a result of “Central Planning”), Bhopal (non-energy but similar in operation), Hanford, and Three Mile Island (which was minor or almost major depending on who you talk to). When individual oil drillers spilled some oil it was easy to rectify and did little harm to the local surroundings. But as these systems were consolidated and expanded, little accidents often led to large disasters.
This is a natural outcome of any system that is scaled whether it is energy production or transportation. A car crash has less impact than a 747 hitting a mountain. Accidents in these facilities have evolved from damaging buildings, to city blocks, to entire cities and more recently coastlines. If you believe science fiction writers, once we achieve fusion power we may have the potential for a mistake to destroy the planet, but we already have that with despots and nuclear weapons.
My point is that common sense and risk assessment do not often evolve as quickly as the utilization of new technologies. That is why we have regulation to begin with. Behind most regulation is a dead body or damaged property. When used to enforce safety and protect other people’s rights, regulation is a useful and necessary component ofsafe and sensible growth. Unfortunately is has been seized upon by those on the left who want to reshape and “plan” society instead of encouraging its development.
“My point is that common sense and risk assessment do not often evolve as quickly as the utilization of new technologies. That is why we have regulation to begin with.”
In other words, the people working with the technologies and those most familiar with them are unable to devise adequate safeguards to prevent harm, but the government officials who do not work with the technologies and often have little to no familiarity with their intricacies can?
“Do you have this in a single article format with references?”
You can get a PDF of the article at the following link:
I am pro nuclear; but I think you have let hyperbole get in the way of facts…
Nuclear power “virtually banned” when we have by far the greatest use of nuclear power of any country in the world?
The free market developed nuclear power when it was all backstopped and led by the US Government? Basic research, development of reactors for naval vessels… scale up to power plant size, at least 15 years of government funded “demonstration” plants… Ike’s “Atoms for Peace”… Then let’s get into rate base treatment in the old utility model… essentially a 40 year put option on the rate base to the rate payers…
Nuclear Power is like the various river development schemes… “better living brought to you by Big Government”…
Nuclear power was nothing but a government program…
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