Chapter 3

The Industrial Development of the United States,



As early as 1750: American colonists knew about oil seepages in various parts of the USA

Especially New York State, Pennsylvania &

West Virginia

Little known use for oil => little demand

****SUPPLY & DEMAND*****

Economic Theory : attempts to describe, explain, & predict

changes in the price & quantity of goods sold in markets



Supply : is the amount of goods producers are willing and able to sell at a given price.

Demand : the quantity of a good that

consumers are not only willing to purchase, but also have the capacity to buy at the given price



Example of supply: Ailsa has 100 potatoes that she will only sell if the market price goes up from 0.75 per lb. to 0.90 per lb.

Example of demand: Michila will of Ailsa’s potatoes if the market price is

0.75, but she will only the price is 0.90 per lb.

buy buy 10

5 potatoes if



As the supply of a product the price generally scarcity) increases , falls (b/se less

As the supply of a product prices will generally greater) decreases , rise (b/se scarcity is

For example: computers



As demand for a product prices generally fall decreases ,

As demand for a product prices generally rise increases ,

For example: Tickle Me Elmo

Back to the Oil Industry…

Introducing a Canadian (finally!)

The market for oil remained small until the


1840s: Abraham Gesner , a Canadian geologist (yay!) developed kerosene

Kerosene: fuel distilled from oil or coal. Used as fuel for lamps.

1854: Gesner had perfected the technology to produce kerosene commercially


Demand for Kerosene (and oil) increased

What’s the big deal about oil?

Even though Gesner’s innovation led to an increased demand for oil, it was not a valued commodity

Nobody thought of drilling for oil

Sometimes people dug for water and found oil instead

There was enough oil from natural seepages to produce kerosene

But over time, uses for oil were developed, and oil’s value as a natural resource increased

George Bissell’s great idea

1857: George Bissell (part owner of the

Pennsylvania Rock Oil Company) got the idea that there may be oil trapped underground (just like water)

Bissell thought oil could be found by drilling wells

Bissell’s idea was great, but he had no money (the Pennsylvania Rock Oil

Company was bankrupt)


George Bissell & Edwin Drake

1858: Bissell talks to Edwin Drake about his idea to dig for oil

Drake visited the area around the

Pennsylvania Rock Oil Company (in

Pennsylvania) to see for himself

Drake decides Bissell is onto something

Drake’s wanted to make sure his venture was a success, and because Bissell was experienced in the matter, Drake’s first move was to reorganize Bissell’s failing company

Drake changed the name to the Seneca Oil


Drake strikes oil!

June, 1859: Drake and the Seneca Oil Company begin drilling first oil well

It took most of the summer to reach a depth of 20 m

Local people though they were crazy – referred to the well as “Drake’s Folly”

At just over 20 m, they struck oil & the well became an overnight success

Drake’s oil well

Black Gold

By the time Drake’s well was finished, most of the easy-to-reach surface oil had been used

Oil – price per barrel: $18!

Drake’s well was pumping 25 barrels of oil a day

Seneca Oil Company was raking it in

News of Drake’s well triggered a “black gold rush” (similar to the California gold rush of


Did you know?

Edwin Drake’s oil well was NOT the first oil well

Did you know that the first oil well was drilled in

Ontario by James Williams in 1858 to a depth of


Canada was actually the first country to have an oil well!

Williams’ discovery set off a flurry of activity which briefly made southwestern Ontario a world leader in petroleum drilling & production skills & technology

Boom & Bust

History of oil industry shows a pattern of boom and bust

The wells that were drilled after Drake’s discovery began to produce a lot of oil


Market was flooded => price of oil dropped to only 10 cents a barrel within three years!!!

The many problems of the oil industry

Problems with storing oil

In the beginning, oil was stored in the ground in wooden reservoirs

Later, these reservoirs were made of cement

Eventually, oil companies began making the huge, above-ground steel tanks we see today

Problems with transporting oil

Transportation was obviously a problem b/se oil was often discovered in remote areas

Needed to be transported to a refinery for processing

Attempts to solve this problem:



Haul oil in large horse-drawn wagons => problem: slow & costly


Trains hauled oil in barrels stacked on flat railroad cars

=> this worked

Later, flat cars were replaced w/specially built wooden tank cars

Then steel tank cars

Solution to oil transportation problems

Development of pipelines

Move huge amounts of oil quickly & efficiently

North America is now crisscrossed w/a network of pipelines

Problems with refining oil

Refining problems were actually the biggest challenge in the oil industry

In the early stages, kerosene was the main product of the refining process

But the “nuisance” by-product was gasoline

Internal combustion engines had not been developed, so there was no use for gasoline

Can you believe they used to dump the gasoline “waste” into nearby rivers and creeks!

Move away from kerosene

1900: electric light bulb was invented

=> replaced kerosene lamp

Advantages of electricity:

Consequence of electric light bulb invention:

Demand for kerosene dropped

Automobile was becoming a popular means of transportation => new market for gasoline

Problems with refining oil,


Primitive technology

It took 100 barrels of crude oil to produce 11 barrels of gasoline – huge amount of waste

1913: thermal cracking developed new refining process developed

New refining process

By 1918, refineries had more than doubled the amount of gasoline tat could be produced from a given amount of oil

What else was going on in 1918 that may have motivated this push towards refining efficiency?

The hungry war machine

WWI (1914-1918) & WWII (1939-1945) increased the demand for oil & gasoline

Tanks, ships, & airplanes all used huge amounts of both oil & gasoline

“War machine” really increased human dependence on oil

Petrochemical industry

Petrochemical industry : finds & processes petroleum & natural gas to produce products for consumers & industries

Petrochemical industry developed catalytic cracking

Produced gasolines w/higher octanes suitable for high-performance cars & aviation fuel

What contributed to the growth of the oil industry?

John D. Rockefeller & the Oil


John D. Rockefeller

Son of a peddler

Only 23 when he entered the oil business

1870: Rockefeller started the Standard Oil

Company of Ohio (would eventually become the first billion-dollar corporation)

Rockefeller bought or built:

Oil wells



Even retail sales outlets

Controlled everything from the production or crude oil to the sale of the finished product

Gaining control of the boom & bust cycle – the beginnings of a monopoly

Rockefeller gained complete control of the oil industry => vertical integration

B/se of the supply & demand cycle & boom & bust, Rockefeller needed to control the erratic price swings

1870-1882: Rockefeller & his associates bought most of the oil refineries in Cleveland, Ohio & other cities

Now he could control the supply of oil to keep prices high enough to make good profits

1882: Rockefeller formalized his control of the oil industry by creating the Standard Oil Trust

The beginnings of a monopoly

Horizontal integration : a company that controls all parts in the production of a finished product

For example: an automobile company would be horizontally integrated if it manufactured glass, tires, engines, sheet steel, and other components of a car

Interesting change in perception b/se the cottage industry would technically be a form of horizontal integration

Blocking a free market economy

What is a market economy ?

People hated the Standard Oil Trust

When businessmen combine to form trusts, cartels, or trade associations, they can make arrangements to fix high prices on their goods or services

Why are these agreements bad?

Gov’t intervenes

US gov’t passes a series of laws

1890: Sherman Antitrust Act

Illegal to form combinations or groups which restrain trade

Illegal to create a monopoly

Monopoly : one firm controls the entire industry

State of Ohio used this Antitrust Act to dissolve the Rockefeller Trust

Rockefeller refuses to give up

Rockefeller moves onto New Jersey & forms a new company called Standard Oil of New Jersey

New Jersey allowed firms to hold shares in other companies outside the state

Standard Oil bought shares in all the other companies of the old Standard Oil Trust

=> regained control of the oil industry

US gov’t fights back

1906: President Theodore Roosevelt launched new antitrust action


Court case

Records showed Standard Oil had made profits of 1 billion dollars on only ¼ of a century!

1911: court decided against Standard Oil => ordered the selling of subsidiaries

Lessons learned from Rockefeller Trust

Need for gov’t intervention to ensure free market conditions

Ideally a free market would be…well…free, but the Trust showed that businesses could form a monopoly & gain control of an industry

Key issue: to what extent should the gov’t interfere w/the free market economy of the United States?

Standard Oil Trust lives on

Many of the Standard Oil firms have become the largest companies in the world





Atlantic Richfield

Exxon, the new name for Standard Oil, is still the largest oil company in the world

Political cartoons

What is the significance of these political cartoons?

What are they trying to say about the oil industry today?

Political cartoons

, continued…