What did we do before oil?
For centuries, wood was the global fuel. It was used for cooking, building, and staying warm in the winter. In the early 18th Century, the steam engine gave rise to a new power source: coal. Wood powered steam engines just fine, but coal had four times the amount of energy in the same volume. With four times the power, wood was out and coal was in. Locomotives travelled the country and ships powered by steam travelled the seas. After a big oil boom in the mid-1800s, the popularity of oil grew quickly, and in the 20th Century, oil would dominate the energy industry.
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When was oil actually discovered?
Asphalt was used in the construction of walls and towers in Babylon after being found on the banks of the River Issus. By the first century BC, writings in China cite the use of petroleum without any refining or drilling, and being used as a fuel in the fourth century BC. The earliest oil wells were drilled in China in the year AD 347. By attaching drill bits to bamboo poles, holes up to 800 feet deep were drilled for oil. By burning the oil, brine was evaporated, producing salt. Ancient records from China and Japan appear to show natural gas being using for lighting and heating. Petroleum was continually used in other places, such as Baghdad, where the first streets were paved with tar from the naturally occurring local fields.
The modern history of oil
In 1847, a Scottish chemist named James Young found a natural petroleum seepage at a coal mine in Derbyshire, England. By distilling the oil, he created a thin oil for use in lamps and a thicker oil for use as lubrication of machinery. Since the seepage was located in the sandstone roof of the coal mine, he thought that heat could possibly be used to create oil artificially. After numerous experiments, he was able to distill canned coal into a fluid like petroleum. The distillation produced different useful materials, and he filed a patent for a paraffin wax in 1850. According to Wikipedia, “In 1850 Young & Meldrum and Edward William Binney entered into partnership under the title of E.W. Binney & Co. at Bathgate in West Lothian and E. Meldrum & Co. at Glasgow; their works at Bathgate were completed in 1851 and became the first truly commercial oil-works and oil refinery in the world, using oil extracted from locally mined torbanite, shale, and bituminous coal to manufacture naphtha and lubricating oils; paraffin for fuel use and solid paraffin were not sold till 1856.”
Discoveries about coal were being made in other countries as well. “In 1846, Canadian geologist Abraham Pineo Gesner refined a liquid from coal, oil shale and bitumen that was cheaper and burned more cleanly than other oils. He dubbed this liquid ‘kerosene’ and founded the Kerosene Gaslight Company in 1850, using the oil to light the streets of Halifax and later the US.” according to Offshore Technology. Capacity was becoming an issue for Gesner, but as petroleum grew in popularity, it provided an easy path for kerosene production.
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The birth of the U.S. oil industry
In Pennsylvania, petroleum seeps were common. Native Americans had been using them for hundreds of years, but farmers found crops didn’t grow well where there was oil on the ground, avoiding areas with evidence of oil. Salt water wells were common at the time, but oil contamination of these wells was a nuisance. A man named Samuel Kier started extracting oil from his saltwater wells. After finding that the oil he was extracting had the same chemical structure as the medicinal oil prescribed for his wife, he sold it and made a fortune. He eventually teamed up with John T. Kirkpatrick to start the first refinery, and together they were able to make a clean, efficient lighting oil with little to no smoke or smell.
After hearing of Kier’s success, George Bissell formed Pennsylvania Rock Oil Company, hiring Edwin Drake to drill for crude oil in Titusville. In 1858, the name was changed to the Seneca Oil Company with Drake at the helm as President. Using a steam engine to drill, they couldn’t find a large amount of oil, just traces. The company gave up, and Drake continued drilling with his own personal line of credit, finally striking oil on August 27, 1859, at 69 feet underground. Unfortunately, the oil boom exploded around him, and he had not acquired much land nor had he patented his drilling method. He had drilled the first oil well at the source, and started the oil boom. A little known fact, Drake's oil well was not the first to be drilled, the first oil well ever drilled was in 1857 by American Merrimac Company in the Caribbean, to a depth of 280 feet.
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The U.S. Oil Rush
Seneca Oil Company and others drilled many wells in the area after Drake’s first well. In 1859, the first year, 4,500 barrels of oil were produced. By 1866, the oil rush had created so many towns in Oil Creek Valley that it was hard to tell where one ended another started. Titusville went from 250 residents to more than 10,000 in about five years and became a city. According to Wikipedia and The Great Oildorado: The Gaudy and Turbulent Years of the First Oil Rush: Pennsylvania, 1859–1880, “Ironworks were erected to supply drilling tools and eight oil refineries were built between 1862 and 1868. Pithole expanded from four log-cabin farmhouses to a bustling city with over 50 hotels over the span of five months in 1865.”
Just ten years after Drake’s struck oil, in 1869, crude output was 4,000,000 barrels, growing to 10,000,000 by 1873. Europe imported a huge amount of oil from America in the 1860s, with the U.S. exporting more oil than it was using.
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Rockefeller and Standard Oil
When Titusville boomed, a man named John D. Rockefeller heard about the discovery and recognized an opportunity. He sold his commission firm in Cleveland, Ohio in order to build an oil refinery, eventually opening an export office in New York. In 1867, he formed Standard Oil Company with his brother William, S. V. Harkness, and Henry M. Flagler. Due to explosion of new oil companies around the Titusville area, Standard Oil began buying and merging with competitors. Only three years later, Standard was the biggest oil refining company in Pennsylvania.
With the need to move large volumes of oil, pipelines became a popular way of efficient transport. When a four mile pipeline was constructed from Pithole, Pennsylvania to the nearby railroad, Rockefeller immediately started buying pipelines, eventually owning the majority. He would at one point, acquire 90% of the refining capacity, pipelines, and gathering systems in America.
With a sharp price decline in oil, a Standard Oil alliance was formed in 1871. Over the next 11 years, Standard Oil Company built itself into a massive corporation integrated into all facets of oil. According to History.com, “The alliance employed an industrial chemist, Hermann Frasch II, to remove sulfur from oil found at Lima, Ohio. Sulfur made distilling kerosene very difficult, and even then it possessed a vile odor—another problem Frasch solved. Thereafter, Standard employed scientists both to improve its product and for pure research. Soon kerosene replaced other illuminants; it was more reliable, efficient, and economical than other fuels.”
Transport of petroleum products was interrupted by the Civil War, creating the need for a better way to get oil in California. In 1900, Standard finally purchased the Pacific Oil Company, its first foray into western oil, followed by Pacific Oil, which would eventually become Chevron. The first well in Los Angeles was drilled in 1892, followed quickly by more wells; 2500 wells and 200 oil companies were operating in the area within five years.
Tax and operations problems caused Standard to create the Standard Oil Trust in 1882, then creating the Standard Oil Company in 1899, the parent company. This setup was similar to a modern-day holding company. During this time, plenty of competition from other companies like Pure Oil Company, established in 1895, put pressure on Standard.
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Texas oil strikes!
In Beaumont, Texas, 1901, one of the largest oil strikes in history happened at Spindletop. The huge gusher ended a chance for monopoly by Standard Oil. Over 1500 companies appeared within a year of Spindletop, including some of the longer lasting names: Gulf Oil Corporation, Magnolia Petroleum Company, and the Texas Company. Many other companies moved to Texas right after. By 1909, the United States produced more oil than the rest of the world combined. No matter the price of oil, it was set at the price at the Gulf of Mexico, giving the United States significant power.
Monopoly
Standard grew large, and used its size and power to acquire better railroad rates and rebates on shipments. Influencing Congress through what would now be considered unethical tactics also helped it solidify its position, but it couldn’t last forever. According to History, “In 1911 the Supreme Court declared that the Standard Trust had operated to monopolize and restrain trade, and it ordered the trust dissolved into thirty-four companies. That the trust’s share of the industry had declined from 33 to 13 percent the Court held to be of little consequence.” This move would seek to ensure competition with the industry giants, but without a monopoly. Standard Oil Company would survive even after being dissolved, and would eventually become Exxon.
For decades, gasoline had been a worthless by-product of distillation. The early 1900s brought with it cars and airplanes that used gasoline, improving methods to refine and produce it. Prior to World War I, the United States contributed oil to the Allies. At the end of the war, in 1919, the American Petroleum Institute was founded to set standards for America’s oil and natural gas industry.
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BP and Shell
While Rockefeller focused on the United States, the Nobel and Rothschild families focused on the controlling other assets, like Russia’s massive oil reserves. “In search of a global transportation network to market their kerosene, the Rothschilds commissioned the first oil tankers from a British trader, Marcus Samuel. The first of these tankers was named the Murex, after a type of seashell, and became the flagship of Shell Transport and Trading, which Samuel formed in 1897”, according to EKT Interactive. Royal Dutch Petroleum started in the Dutch East Indies in the late 1800s, eventually merging all of its operations with Shell Transport to form the Royal Dutch Shell Group.
In 1907, a British gold miner and a Middle Eastern shah discovered oil in Iran, forming the Anglo-Persian Oil Company. The British government, wanting to make sure the Royal Navy had enough oil before World War I, bought 51% of the company. It would become British Petroleum in 1954, now known simply as “bp”.
The original super majors as known today include: ExxonMobil (Standard Oil Company), Shell (Royal Dutch Petroleum and Shell Transport), and bp (Anglo-Persian Oil Company). In the 1930s, multiple companies discovered oil in Kuwait, Libya, and Saudi Arabia. According to EKT Interactive, “Based on those discoveries, a cartel of seven companies was formed that controlled the world’s oil and gas business for much of the twentieth century. Known as the Seven Sisters, they included: Exxon (originally Standard Oil), Royal Dutch/Shell, BP, Mobil, Texaco, Gulf, and Chevron.”
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OPEC
In the 1950s, power started to shift. By 1960, due to the Seven Sisters or ‘Integrated Oil Companies (IOCs), the Organization of the Petroleum Exporting Countries (OPEC) was formed by Iran, Iraq, Kuwait, Venezuela, and Saudi Arabia. This solidified economic and geopolitical control over their countries’ resources, placing them in a better position to negotiate with the IOCs. By the 1970s, increasing demand for energy increased OPECs power - they could coordinate their prices and policies, preventing Western oil companies from driving down prices. During this time, the United States with decreasing production had to increase oil imports while balancing relations with OPEC. This included a shift toward non-reliance on foreign sources of energy while maintaining those relationships. “Today, members of OPEC are: Algeria, Angola, Ecuador, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, United Arab Emirates, and Venezuela”, according to EKT Interactive.
National Oil Companies
More recently, national oil companies have gained prominence. “Hugo Chavez’s decision in 2007 to abandon production agreements and other forms of collaboration with IOCs in Venezuela has tightened control of PDVSA’s (The National Oil Company of Venezuela) current production and access to reserves by the government.” Russia acted similarly with Gazprom, the state-controlled gas group, eliminating contracts with IOCs. NOCs now make up a majority of world oil and gas production, compared to 7% in 1972.
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Current
In 1997, fracking began, leading to a huge increase in oil and natural gas production. Horizontal drilling added to this technology, and natural gas prices dropped 85% from 2008 to 2012. Benefits include: move away from coal plants, exporting LNG instead of importing, natural gas as transportation fuel, and cleaner energy. Fracking has significant drawbacks, with high use of water (up to 5 million gallons per well per year), potential for chemical pollution of water reserves, and other environmental issues.
New technology in existing industries like oil, natural gas, and even coal are evolving at a rapid pace, although adoption is somewhat slower on a large scale. Renewable energy is now a primary focus for many energy producers, with bp’s recent shift from “international oil company” to “integrated energy company focused on delivering solutions for customers – transforming from IOC to IEC” (bp). Huge investments in solar, wind, hydro, nuclear fission are more and more common. Future solutions like anti-solar and nuclear fusion are in the works, and will further create the opportunity for self-reliance in energy.
Happy Friday!
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