Interesting things from Part 1 of The Prize
I’m reading The Prize: The Epic Quest for Oil, Money & Power, a popular history of oil.
Just finished Part 1. Some interesting things from the book so far:
- The oil industry began in Pennsylvania in the 1850s. At the time, oil was not obviously a highly useful resource. In its unrefined form, it was occasionally used to light torches or grease wheels — by people who skimmed it off of ponds or otherwise collected it from “seepages.” What makes it useful is refining, which originally was done by boiling it. This separates it out into different substances. (The first entrepreneurs to seek out oil as a commodity hired a famous chemist to figure this out, and used his report to raise funding.)
- Further, the idea of drilling for oil or any resource was unusual. Plenty of minerals were mined, that is, dug up out of the ground. But the idea that you could drill into the earth — maybe hundreds of feet — and pump up something valuable was new and kind of crazy. The only precedent was boring for salt water (I think to get the salt itself).
- The initial drilling, at Titusville, PA, went on for a long time without success, and money was running out. The investors/management actually sent a letter to the guy who was out in the field overseeing the drilling, a man by the name of Drake, telling him to pack up, close down and go home. But the letter took a week or two to reach him, and while it was in transit they struck oil for the first time in history. If the timing had been just a week off, who knows how much longer the world might have waited for oil.
- The first major use of oil was kerosene for lighting. In the mid-1800s, light was often obtained from candles, typically made of animal fat. Light, even low-quality light, was expensive. The high-quality (but even more expensive) source of light was sperm whale oil, and the whales were being hunted to extinction. Kerosene provided a good light, and it was cheap. (So, incidentally, Rockefeller saved the whales. By the way, the economic history of light is covered in a good Planet Money episode.)
- If you weren’t careful in the refining process, though, you could get poor-quality kerosene, where by “poor quality” I mean “might explode and kill you.” (I think the potential problems included gasoline mixed in with the kerosene.) So quality control, meaning consistency of process, was literally a matter of life or death. Rockefeller named his company “Standard Oil” to emphasize the standard, uniform quality of their product, and Standard’s quality control literally saved lives.
- In the early days of oil, there weren’t sophisticated geological surveys with seismic whatnot to see under the earth and discover oil. Instead, they found oil basically where it was already coming up out of the ground. You would hear reports of “seepages”, or there would be some field where the rocks were literally coated in oil, and you would just try drilling there. And if you drilled a thousand feet and got nothing… oops. Drill somewhere else.
- A lot of the early innovation in oil was in just handling and transporting it. At first it was put in barrels and carried on wagons and trains. Then they figured out it would be more efficient to fill up an entire tank of the stuff; tanker cars were invented. At some point — and this must have seemed crazy at the time — somebody got the idea that you could build an enormous pipeline for hundreds of miles, and just pump the stuff all the way to the refinery. The first pipeline was actually built relatively early on.
- For a while, kerosene lighting was the major product of the oil industry. Then in the 1880s Edison invented the electric light bulb, and electric lighting quickly took over. The market for kerosene was shrinking. But soon afterward, the automobile was invented, and Ford came along to produce a lot of them cheaply, and gasoline — which had previously been basically a waste product of the refining process — became a hot commodity. So the oil industry continued, just shifting its product from kerosene to gasoline.
- Of course, in the early days, no one knew how much oil there was or how long it would last. Wells would produce a lot for a while and then go dry (especially if they were poorly managed). It also wasn’t clear whether there was oil in places other than Pennsylvania: “In 1885, the State Geologist of Pennsylvania warned that ‘the amazing exhibition of oil’ was only ‘a temporary and vanishing phenomenon — one which young men will live to see come to its natural end.’”
- But then oil was discovered all over the world. In Baku, Russia (in the Caucasus, on the Caspian Sea, in what is now Azerbaijan). In Sumatra (I think) and other parts of the far East. In Texas, at Spindletop, in 1901. And eventually in Persia (what is now Iran).
- The Persian venture in particular was one of the most difficult, with many false starts and lots of money spent before any progress was seen. In the beginning it was not at all obvious that there would be a huge store of oil there. In fact, there was an echo of that scene from the first well in Pennsylvania: The backers of the Persian expedition sent a letter telling them to give up and shut it down, and while the letter was in transit they finally found the oil they’d been seeking for years. Again, amazing how close they came to giving up, when they were sitting on top of one of the world’s largest oil reserves.
- A lot of the oil companies we know today have their origins in the late 1800s and very early 1900s. Shell was a company started by the sons of a Jewish merchant in England; their father traded all sorts of oddities including sea shells, and their early ships were named after different types of shells. Royal Dutch was a Dutch company operating in the East that eventually merged with / acquired Shell. Out of Spindletop, TX came companies such as Texaco. And after Standard Oil was broken up in an antitrust suit, it became S.O. → Esso → Exxon, and the other fragments of it became companies like Mobil.
- Rockefeller was an amazing figure and a productive genius: “Whereas many of the other robber barons amassed their wealth by speculation, stock and financial manipulation, and outright fraud — cheating their stockholders — Rockefeller built his fortune by taking on a youthful, wild, unpredictable, and unreliable industry, and relentlessly transforming it according to his own logic into a highly organized, far-flung business that satisfied the basic hunger for light around the world.” Logic, organization, was Rockefeller’s watchword.
- Rockefeller, and the other executives at Standard, also never fully grasped the public’s criticism of them: “They thought it was cheap demagoguery, uninformed jealousy, and special pleading. They were sure that, in its relentless pursuit of its own interests and enrichment, Standard Oil was not only checking the scourge of ‘unbridled competition,’ but was also truly, as Rockefeller himself said, perhaps the greatest of ‘upbuilders’ that the nation had ever known.”
- The oil in Persia eventually became strategically important for Britain, because they had decided to convert their naval fleet from coal to oil. This decision — spearheaded by Churchill, then Admiralty of the Navy — was remarkable and controversial, because Britain had a secure local supply of coal in Wales (I think), whereas oil was going to have to come from abroad. It wasn’t clear that oil would be available reliably, at reasonable prices, for the long term, in peace and in war. But the technological advantages of oil were so strong that Churchill began the conversion of the fleet even before finding a secure long-term source of oil. Unfortunately the book doesn’t go into much detail on what these advantages are, but I gather that a key part of it is that oil, a liquid, can be pumped, whereas coal has to be shoveled. So it’s easier to move the fuel around within a ship, or to refuel a ship. Eventually the British government took a controlling interest in an oil company operating in Persia, just to ensure supply for military purposes. And not a moment too soon: the decision passed Parliament on June 17, 1914 — just eleven days before the outbreak of WW1.
- Finally, as an entrepreneur, I was struck by this passage that shows that nothing about startups has changed. William Knox D’Arcy was one of the entrepreneurs who had developed Persian oil, and the effort went on so long without initial success that he had poured a lot of his own money into it. Eventually he had to sell it and lose control: “D’Arcy came out well in the end. He was compensated for the exploration expenses that had so sorely tested his pocket, and he received shares worth a market value of £895,000 (£30 million or $55 million today). Yet D’Arcy could see the venture slipping further from his grasp. ‘I feel like signing away a child,’ he lamented on the day he came to final agreement with [the acquirer] Burmah Oil.”
All the above from memory and my Kindle highlights; no time for fact-checking or further research so take all the above as if I had told it to you over dinner impromptu.