The Oil Era

About this programme by Peter Day

In August 1859 Colonel Edwin Drake dug himself into a hole, and made history. He wasn't actually a colonel (it was a title someone else dreamed up to impress people) but the hole his team drilled struck what was then called rock oil near the tiny Pennsylvania village of Titusville on the weekend of August 28th, and ushered in the great Oil Era we are still taking part in.

Edwin Drake was a railway conductor on sick leave who had retained his free pass on the railways, a useful asset for an underfunded oil prospecting enterprise. (The railroads will play a further vital part in this story later on.)

His improvised team started boring a hole in a creek where oil had been oozing up from underground for generations. But the deeper they bored the sooner the hole fell in on itself and clogged up.

Drake had the idea of protecting the drill hole in a series of collars that were extended as the bore went deeper. Just when the backers were on the point of giving up, they hit oil, in such quantities that they ran out of barrels to put it in.

The story is compellingly told in the book The Prize: the epic quest for oil money and power by Daniel Yergin, founder of the energy consultancy now called IHS Cambridge Energy Research Associates.

He has just issued a revised edition, so we got him on the line from Washington DC to talk about the industry as it was then and is now for this programme.

Back at the start of the Oil Era, the focus soon shifts from the piecemeal chaos of early Pennsylvania rock oil production to the organising genius of the capitalist giant John D Rockefeller. Working as a commodities dealer in Cleveland when the great oil rush started, Rockefeller soon realised that the key to riches was control of the refining facilities that turned sticky black oil into clean-burning kerosene.

Barrel

By 1865 he had the largest refinery in Cleveland, just as the end of the American civil war was ushering in a huge economic expansion all along the East Coast of the USA. Rockefeller got his brother to open another office in New York

I have already noted that the railways would play a big part in this story. Rockefeller's partner Henry Flagler was in charge of transport and used the huge buying power of Standard Oil to extract big rebates or discounts from the railroad companies who carried the oil. Standard even negotiated payments from the rail companies for every barrel of other companies' oil they shipped.

Rockefeller's Standard Oil Company (later Esso, of course) achieved an extraordinary 80 percent grip on the oil market when it was still in an evolutionary stage, moving from refining and transportation into oil production in the 1880s. The company’s grip on the railroads was a vital part of its abiding power.

Wager

But it is sobering to remember that Rockefeller's billionaire fortune had been made well before the coming of the gas-guzzling automobile. Standard Oil established its supremacy - and to a large extent the structure of the whole oil industry - by providing oil (or kerosene) for lighting as a replacement for whale oil.

When town gas and electricity shoved kerosene aside, the car was there to more than take up the slack in demand for oil.

I've been thinking about this extraordinary Oil Era story in a week when the great American investor Warren Buffett spent some US$40-billion on buying up the American railroad company Burlington Northern Santa Fe.

He issued a statement saying he's making "an all-in wager on the economic future of the USA" which sounds risky to me (except that Burlington has a lot more than just railroad interests).

But Warren Buffett's remark is a haunting echo of an observation Rockefeller's energetic partner Henry Flagler made at the very start of the Oil Era which in global economics has also (of course) coincided with the American Era.

Henry Flagler's 19th century business advice was: "Keep your head above water and bet on the growth of your country."

Some things never change, except that they do, they do.