continued…

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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

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Economic Theory : attempts to describe, explain, & predict
changes in the price & quantity of goods sold in markets
1.
2.
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

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,continued…
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

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,continued…
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

,continued…

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As demand for a product prices generally fall decreases ,
As demand for a product prices generally rise increases ,
For example: Tickle Me Elmo

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The market for oil remained small until the
1840s
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
Result?

Demand for Kerosene (and oil) increased

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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



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)

Why?

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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
Company

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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

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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
1849)

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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
15m?
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


History of oil industry shows a pattern of boom and bust
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The wells that were drilled after Drake’s discovery began to produce a lot of oil
Result?

Market was flooded => price of oil dropped to only 10 cents a barrel within three years!!!

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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

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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:
1.
2.
Haul oil in large horse-drawn wagons => problem: slow & costly
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Railroads
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

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Development of pipelines
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Move huge amounts of oil quickly & efficiently
North America is now crisscrossed w/a network of pipelines

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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!

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1900: electric light bulb was invented
=> replaced kerosene lamp
Advantages of electricity:
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Consequence of electric light bulb invention:

Demand for kerosene dropped
Automobile was becoming a popular means of transportation => new market for gasoline

continued…
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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?

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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

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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

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John D. Rockefeller
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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
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Refineries
Pipelines
Even retail sales outlets
Controlled everything from the production or crude oil to the sale of the finished product

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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
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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

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


What is a market economy ?


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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?



US gov’t passes a series of laws
1890: Sherman Antitrust Act

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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 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


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1906: President Theodore Roosevelt launched new antitrust action
Result:



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


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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?

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Many of the Standard Oil firms have become the largest companies in the world

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Exxon
Mobil
Amoco
Chevron
Atlantic Richfield
Exxon, the new name for Standard Oil, is still the largest oil company in the world



What is the significance of these political cartoons?
What are they trying to say about the oil industry today?

, continued…