Download Document

Chapter 3
The Industrial Development of
the United States, continued…
THE OIL INDUSTRY

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
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
SUPPLY & DEMAND


,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 buy 10
of Ailsa’s potatoes if the market price is
0.75, but she will only buy 5 potatoes if
the price is 0.90 per lb.
SUPPLY & DEMAND



,continued…
As the supply of a product increases,
the price generally falls (b/se less
scarcity)
As the supply of a product decreases,
prices will generally rise (b/se scarcity is
greater)
For example: computers
SUPPLY & DEMAND



,continued…
As demand for a product decreases,
prices generally fall
As demand for a product increases,
prices generally rise
For example: Tickle Me Elmo
Back to the Oil Industry…
Introducing a Canadian (finally!)


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
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)

Why?
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
Company
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
1849)
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
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
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
Result?

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:
1.
2.
Haul oil in large horse-drawn wagons => problem:
slow & costly
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
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,
continued…



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
Industry

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 bough or built:




Oil wells
Refineries
Pipelines
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
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
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






Exxon
Mobil
Amoco
Chevron
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…