Chapter 3The 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. Supply: is the amount of goods producers are willing and able to sell at a given price.

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

2. 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 bought 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…