In this Lesson, we see the birth of the modern oil industry. I say “modern” because fossil fuels and hydrocarbons have been in use for thousands of years. We learned that what defines this new era was driven by several factors- the growth of the “business” aspect, the advent of new technologies and efficiencies, and the shift to “rock oil” or oil recovered by drilling as compared to finding seeps and skimming off the surface. In other words, we started digging for it rather than stumbling onto it. Another fact defining the “modern” oil industry was the incredible diversification in uses. We tend to think of fossil fuels as mainly for heating and transportation, but those uses are relatively recent arrivals to the story. The early years were focused on oil as a source of lighting, as a lubricant, and to an extent, for medicinal purposes. In regard to efficiencies, the rapid evolution from horse-drawn carriages carrying barrels to railroads to seafaring tankers completely altered the dynamics and economics of the business.
The textbook frames these aspects as themes- oil as the rise of modern capitalism; oil as a commodity important enough to impact politics and national strategies, and as something that permeates society so thoroughly that we are in what the book calls the age of “Hydrocarbon Man.” This short half-century from the mid to late 1800s saw this industry go from its birth to unseating coal as “king,” and making itself one of the world’s most important commodities even to this day. As we will see as we go further into the textbook, many of the characteristics of the industry back then still exist and occur today. We will also see how we got to be where we are today.
However, the focus of the first few chapters actually highlights another effect altogether of the oil industry and that is how it shaped and molded the business world as a whole and helped define the era of the giants of the industry. The oil industry taught us many things about the general aspects of being successful in business. We learned that it takes an immense risk, confidence in convictions, patience, and tolerance for failure or at best, long delays between successes. Without this mindset, the giants of their day, most exemplified by Rockefeller, would not have been able to create what they did. Unlike typical manufacturing, in the oil industry, you need to go to where it is. You also need to move it great distances to get it from where it is to where it is needed, with the intermediate elements of processing and refining. It is truly amazing then that it was the oil industry and not typical manufacturing, that was the early pioneer of fully integrated and multinational giants.
By the end of this lesson, you should be able to:
This lesson will take us one week to complete. Please refer to the Course Syllabus for specific time frames and due dates. Specific directions for the assignment below can be found within this lesson.
Activity | Location | Submitting Your Work |
---|---|---|
Read | The Prize: Chapters 1, 2, & 3 (select sections) | No Submission |
Discuss | Participate in the Yellowdig discussion | Canvas |
Each week an announcement is sent out in which you will have the opportunity to contribute questions about the topics you are learning about in this course. You are encouraged to engage in these discussions. The more we talk about these ideas and share our thoughts, the more we can learn from each other.
Even in the earliest days of the business, the pioneers experienced market booms and busts with wild price fluctuations. Some areas that were prolific producing regions quickly dried up. The early days were characterized by an essentially uncontrolled frenzy to find and produce as much as possible. This quickly proved unsustainable, and our oil industry today is much more tempered and organized. Some may see today’s discipline as counter to the entrepreneurial spirit, but in reality, it is necessary to ensure long-term stability.
An interesting point about the early days of the oil industry is the important role that Pennsylvania played. Pennsylvania essentially was the US oil industry. It would only come later, as we shall see in subsequent chapters, that the focus moved to Texas and Oklahoma. And by the time we get to today, the first places people think about in regard to the US oil industry are Texas, Alaska, Oklahoma, Louisiana, and Wyoming. The recent reemergence of Pennsylvania, and the entry of the Dakotas, as oil hubs is due to the advent of hydraulic fracturing, another “necessity driven innovation”.
What is even more interesting from a business perspective is how the oil industry created changes and approaches that we see today in nearly all business sectors, for example, the concept of multinational monopolies and the pushback to these monopolies. We also learned about the concept of the integrated company, which contains many or all aspects of the business. We are used to this now with industry, but the idea evolved from the early oil days when they realized being limited to only a few aspects of the lifecycle led to uncertainty, risk, and vulnerability. Rockefeller’s vision was to control all aspects. Ironically, he didn’t go at it from start to finish in terms of the process. Instead, he focused at first on the middle, the refining, and only later added exploration and production, and then marketing. Not surprising in that the highest risk and uncertainty was in the exploration and production, as compared to refining the product once already in hand.
Rockefeller and Standard Oil also catalyzed the concepts of “cash on hand”, leveraging economy of scale, and reducing, or even eliminating competition. We see all of these aspects today. I am sure many of you can see Rockefeller’s Standard Oil in today’s Walmart or Ford Motor Company. The concept of shareholders and trusts that Rockefeller leveraged to maintain his empire effectively are now common in the business world.
Although a keen, and at times ruthless businessman, Rockefeller was also part of the age of philanthropists that gave us Carnegie, DuPont, and others. They came from a mindset of being successful, providing a service to society, and giving back to do good.
With Chapter 3, we see the beginning of true globalization. This doesn’t mean that the rest of the world didn’t use oil, but what happened in the late 1800’s was the connection between countries by way of multinational business approaches. As the industry was essentially private sector and not bound by national borders and government jurisdictions, it was possible for single entities to see the entire world as a marketplace and source of oil. But with this expansionist view, we also now saw the arrival of new competitors. Whereas Standard Oil may have had a monopoly in the US, they encountered formidable challengers on the world stage. They also encountered significantly more challenging conditions. For those who thought exploring for oil in rural Pennsylvania was challenging, it was a rude awakening to encounter the conditions in Southeast Asia and Russia. The topography was challenging, and the distances were truly vast. Moving oil tens or hundreds of miles paled in comparison to moving it thousands of miles and across waterways and over mountains.
Review the video titled "The Rise of American Oil and the Competitive International Industry" (3:36)