The Prize Chapter 4: The New Century
Consider the following questions:
- What is the human toll of success?
- What are the lessons for economic policy?
- What factors contributed to gasoline-powered cars dominating electric ones?
- Why isn't there current competition between gasoline and electricity in transportation?
- How was Standard Oil affected by the development of oil outside the Northeast US?
- How is oil God's wealth?
- Why did Texas view Standard Oil as a foreign firm?
The Dethroning of Kerosene Oil as an Illuminant by Electric Lighting
The main sources of artificial light by the end of the 19th century were kerosene, gas (synthetic gas from coal or natural gas), and candles, and all had the same problems: they produced soot, dirt, and heat; consumed oxygen, and always posed the danger of fire. Thus, they posed both health and safety hazards. To eliminate these concerns, Thomas Alva Edison started working on electric illumination in 1877 and within two years had developed the incandescent light bulb. By 1885, 250,000 light bulbs were in use and by 1902, 18 million. The commercialization of Edison's invention and the birth of the electric generation industry that offered superior light, priced to be competitive with town gas. (Town gas or coal gas was a combustible mixture of gases obtained by the distillation of coal.) It posed a major challenge to the demand and markets for oil and seriously threatened the survival of Standard Oil and the oil industry. The light bulb was a true marvel of the time, and Edison's lab eventually became the famous Bell Laboratories (formerly known as American Telephone & Telegraph Company (AT&T), Bell Laboratories, and Bell Telephone Laboratories). By the end of his life, Edison had patented 1,093 inventions.
The Automobile as New Market for Oil
About the same time kerosene's dominance was declining in favor of electric lighting, the horseless carriage (automobile), which was then noisy, noxious, and not very reliable had begun to gain credibility in Europe by 1895. Some of these were powered by the internal combustion engine that used gasoline, a byproduct of oil refining, as fuel. In the U.S, the 15 mph of the horseless carriage in 1896 was viewed as slow and boring, making people joke to drivers, "Get a horse"! However, Henry Ford, the chief engineer of Edison Illuminating Company in Detroit, was quite fascinated by it and quit his job to design, manufacture, and sell a gasoline-powered vehicle bearing his name.
By 1905, the gasoline-powered car had defeated its competition powered by steam and electricity. It is worthwhile to know that the electric car was pioneered by none other than Edison. It was, however, not until the San Francisco earthquake in 1906, when 200 private cars (powered by gasoline donated by Standard Oil) helped in the rescue and relief, that skepticism about the ruggedness and reliability of the automobile shifted to full endorsement. Sales of cars, all based on gasoline from oil, were 8,000 in 1900 and 902,000 in 1912. Henry Ford came out with the Model T in 1908. It was the first affordable car that "put America on wheels" with 45 mph, 25 mpg and 20 hp. Mass production started in 1913, and 308,162 were made in 1914. Production of the Model T ended in 1927. To put things in perspective, in 1892, to sell gasoline (then mainly used as a solvent and fuel for stoves) for two cents a gallon was a major accomplishment. The value of gasoline, however, significantly increased with the success of the automobile. A second major new market for petroleum, in addition to gasoline, was fuel oil used in boilers of factories, trains, and ships.
New Oil Finds West of PA and the Emergence of Domestic Competition
In 1895, several independents teamed up to form the Pure Oil Company and turned it into a fully integrated company with significant export markets that successfully challenged Standard Oil. Thus, at last, there was significant and lasting domestic competition. Pure was based entirely in Pennsylvania. However, new oil finds were being found westward in Colorado, Kansas, and California. Prof. Silliman of Yale was once again hired as a consultant by interested parties on the California oil, and he reported fantastic results! Silliman reported on areas where he hardly even looked (some he didn't even see). He basically used his reputation from PA to tell people there was oil wherever he had an inkling there could be oil. To make matters worse, his result of high kerosene potential was because his sample had been spiked with first-rate refined PA kerosene! His reputation was ruined, and the humiliation was so great that he was forced to resign from Yale when the CA prospects fizzled. Eventually, he was vindicated about 10 years later when oil was found in areas of CA such as Ventura County and North of LA in the San Fernando Valley. California's oil production increased dramatically to 470,000 barrels in 1893 and 24 million barrels in 1903 with the dominant producer being Union Oil or Unocal. The regional isolation of CA made its oil have no big impact east of the Rockies as its external markets were in Asia.
Development of Texas Oil - The Boom and Bust Again!
In Texas, because of escaping gases, Pattillo Higgins was convinced there was oil in Spindletop, a salt dome that rose above the flat coastal plain near Beaumont, in southeast Texas. In 1892, he organized Gladys City Oil, Gas, and Manufacturing Company and hired Captain Anthony F. Lucas to drill the salt dome (Spindletop). Lucas started drilling in 1899, and after he failed to hit oil and needed more funds, he went to see James Guffey and John Galey, two of the most successful wildcatters, in Pittsburgh. Guffey and Galey struck a deal with Captain Lucas that required in exchange for their financial backing only an eighth of the deal for Captain Lucas and nothing for Higgins. It was up to Lucas to split his share with Higgins if he wished.
Drilling resumed in autumn of 1900 using the techniques of Rotary Drilling. At 880 ft, oil showed up and on January 10, 1901, there was a gusher - Lucas 1 on Spindletop flowed like an oil fountain at 75,000 barrels per day! Although production had actually begun in other places in Texas, such as Corsicana in 1893, Spindletop proved to be a massive find that all began with Pattillo Higgins' hunch. Thereafter, there was mayhem in Spindletop as the mad scramble for leases began, and tents, shacks, saloons, gambling houses, whorehouses, etc., sprang up to meet the needs of the lusting population.
Land that was less than $10 an acre now went for more than $900,000 an acre; Beaumont's population went from 10,000 to 50,000 in one month. Additional challenges that come with a boom town; they drank half the whiskey in Texas during the early months of 1901; there were 2-3 murders a night; the popular pastime at local bars was betting on how long it would take a rattlesnake to eat a bird in a cage, and there were people (fortune-teller and the boy with X-ray eyes) who claimed to have powers to locate drilling spots for oil. Some people made $40-50/day standing in line at outdoor convenience stores/shops and selling their spaces for a dollar to those who had no time to waste "when they had oil business to do". Within months, there were as many as 214 derricks jammed on top of Spindletop and the Texas oil boom was on. Land value increased dramatically and thousands of people streamed in daily. Salesmen were so numerous that Spindletop became known as "Swindletop". Spindletop was where new oil language (oil lingo) such as "well borer" for the driller, "roughneck" for a skilled helper, and "roustabout" for the semiskilled help were born. There were at least a hundred different oil companies with some working on postage-stamp-size sites. Similar to what happened in PA, the boom caused overproduction and the price of oil to go down to as low as three cents a barrel compared to five cents for a cup of water!
The "Deal of the Century" or a Rotten Deal?
Guffey, the major producer at Spindletop, needed markets, and Marcus Samuel needed to diversify from his dependence on Russian oil, so Shell and Guffey made what appeared to both to be "the deal of the century". Under the deal, signed in June 1901 (6 months after the gusher), Shell would take at least half (a minimum of 15 million barrels) of Guffey's production for the next 25 years for 25 cents a barrel. To Samuel, although the Texas crude was a poor source of illuminant, it was well suited as fuel oil for ships as it had always been his dream and passion to convert coal-burning ships to oil. The deal, while beneficial at the time, soon proved a hindrance to Guffey's company. Within 18 months of the oil strike at Spindletop, by mid-1902, Guffey's company was in trouble with a decline in the underground pressure from overproduction.
This greatly distressed the Mellon brothers (Andrew and Richard), the Pittsburgh bankers who had financed the deal between Lucas and Guffey (and Galey, his partner). (The Mellons had put up $300,000 for the wildcat, plus several million dollars more for production.) William Mellon, their nephew, worked to bring Guffey Petroleum into their Gulf Refining Company and the Mellons offered the enterprise to Standard Oil, but SO said no because of the legal assaults Texas kept launching against it and Rockefeller. William Mellon took over the management control of the combined Guffey Petroleum and Gulf Refining companies. In 1902 and 1903, when production plunged and oil prices were 35 cents a barrel, to meet its contractual obligation with Shell, Guffey Petroleum had to buy oil from third parties and then sell them at a loss to Shell. The Mellons felt it was a rotten deal and not a deal of the century and were determined to break it if they were to make money. Samuel who did not want to cancel the deal was even willing to convert and use his four new tankers to carry Texas cattle back to London when Guffey’s oil supply failed. Eventually, however, a new agreement that guaranteed Shell practically nothing was reached when Andrew Mellon went to meet Samuel in London, and Guffey Petroleum and the Mellons were thereafter free from the original contractual obligation.
Emergence of Independent Competitive Domestic Companies to Standard Oil
Other salt domes along the Gulf Coast of Texas and Louisiana were discovered after Spindletop. However, the Gulf Coast met its match in production from Oklahoma when new oil discoveries in OK began in 1901 and ended in 1905 with the great Glenn Pool near Tulsa. One of the biggest problems for the Mellons was capacity of its refinery in Port Arthur which was equal to all of the oil produced in Texas. With the discovery of the Glenn Pool in OK in 1905, they built a 450 mile pipeline from Port Arthur to Tulsa to beat Standard to it. By October of 1907, oil was flowing through the pipeline and the Mellons were firmly established in the oil industry. They made the company a completely integrated and Mellon Company and called it Gulf Oil Corporation with Andrew as President, Richard as Treasurer, and William (their nephew) as Vice-President. Oklahoma was the dominant producer through much of the early 1900s, but Texas recaptured the #1 rank in 1928 and holds it still today.
Other Competitive Oil Companies That Came Out of the Texas Boom Included:
Sun Oil Company: J. N. Pew and a partner began collecting natural gas and selling it and in 1883 became the first group to supply a major city with natural gas (Pittsburgh) instead of manufactured gas. They sold the company to Standard, and J. N. Pew subsequently formed Sun Oil Company after producing in the Lima field in 1886. Sun Oil, named because of the sun’s prominence above all bodies in the sky, would later become one of the preeminent companies in the Gulf Coast Trade during the Texas boom. It never reached the high of prominence but did carve out a good oil business in the shadow of Standard.
Texaco: Joseph S. Cullinan ("Buckskin Joe"), one of the foremost pioneers of Texas oil development in 1901 in Beaumont, formed the Texas Fuel Company in 1902 and built storage facilities 20 miles away. The Mellons, at the time of trying to find a solution to their Guffey problem, almost merged Guffey-Gulf with Texas Fuel, but the Texas legislature opposed the merger. In 1906, Cullinan registered the name of Texaco and built its own pipeline to the Glenn Pool. Cullinan was very proud of Texas and (like most Texans of his time) was not fond of northerners. His autocratic style of leadership led to clashes between Texas and NY (which Joe did not care for). Joe Cullinan gained control of leases of a syndicate of ex-politicians led by James S. Hogg, the 300-pound 20th governor of Texas (1891-1895) and progressive champion and a great opponent of Standard Oil in Texas. Hogg was a tough businessman and powerhouse who joked "Hogg’s my name" and "hog’s my nature." His daughter was the philanthropist Ima Hogg.
Some Concluding Remarks
With the explosion of oil production on the Gulf Coast and the credible competitors, Standard’s hold on the oil industry was slipping greatly. In 1880, it held 90% of the refining industry but by 1911 held only 60-65% of the industry. The market was growing too large for Standard to monopolize as gasoline sales allowed competitors to enter the market. Gasoline sales more than tripled between 1900 and 1911, and by 1911 exceeded kerosene sales. Standard’s slip in its hold of the industry would leave it vulnerable for the trustbuster, Theodore Roosevelt, in the next election.
In terms of the pioneers at Spindletop, Captain Anthony F. Lucas sold his interests to Guffey and Mellon and moved to D.C. to work as consulting engineer and geologist; Pattillo Higgins ("Prophet of Spindletop") started a lawsuit against Lucas, but Lucas never gave Higgins any money, but he seemed to have, however, made money along the way; James Guffey and John Galey were never able to hold onto money and spent their last days greatly in debt; William Mellon served as president and chairman of Gulf Oil for many years, as it became one of the major oil companies in the world.
Yergin, Daniel. (2008). The Prize: The Epic Quest for Oil, Money, & Power. New York: Free Press.