In the short time passage covered from Lesson 1 to Lesson 2 we see the inevitable consequences of the appearance of a new industry sector. Recall in Lesson 1 the diversification of uses for oil, and the meteoric growth of Standard Oil. We saw in Lesson 1 that with this rapid growth came great success. But brewing underneath that success was the focus of the competition and others' suspicion of ulterior motives.
As with Lesson 1, the readings teach us two stories in parallel. The evolution of the oil industry itself, and the oil industry as an example of the evolution of capitalism as a whole. For example, the appearance of competitors, the obsession with “cutting Standard Oil down to size,” and the expansion of markets. There are two ways to succeed in business- get a bigger piece of the pie, but also see what you can do to make the pie bigger! Consider what you read about the early days of the oil industry to what you see today with electronics, social media, and the entertainment industry.
Another significant takeaway from the readings in Lesson 2 is that what may seem like a solid business that will last forever rarely does. In a short time, the oil industry almost disappeared simply because of the invention of electric lighting. It was only by sheer luck that the automobile came along at the same time and innovation found a way to utilize oil products for that market. The key was the ability of the oil industry to see what was happening and find a way to adapt. The oil industry never stopped innovating since then, and today, the uses of crude oil products are staggering. A common misconception by society is that if we can eliminate the automobile, there will no longer be a need to drill for oil and gas. Many people will be quite disappointed if they knew how many day-to-day household necessities come from crude oil products. So even if phased out of transportation or power generation, there will be a lot more innovation needed to phase out its other uses entirely.
With Lesson 2 we will discuss the loss of oil markets with the invention of electric light and the almost simultaneous regaining of new markets with the development of the automobile. It also discusses the decline in the dominance of Standard Oil with the discovery of oil in other parts of America and the subsequent emergence of competitors. But at the same time we will also discuss the growing public hatred against big oil, and the cry for the Federal government to break up Standard Oil as a way of overcoming its monopoly. Concurrent with the desire to break up the monopoly that was Standard Oil, the concept of the major international oil company was born. The rise of Royal Dutch/Shell as a major international oil company and the fall of the Russian oil industry will also be discussed.
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 4, 5, & 6 (select sections), and The Quest: Chapters 2 & 4 (selected sections) | No Submission |
Discuss | Participate in the Yellowdig discussion | Canvas |
Complete | Complete Quiz 1 | 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.
The chapter is characterized by additional themes. We see the rapid, and fortuitous transition of the industry from primarily supplying fuel for lighting to now supplying fuel for transportation- mainly for the newly commercially mass-produced automobile. And not a moment too soon because the invention of the electric light completely decimated the oil for lighting business. To this day, fossil fuels are fundamental to transportation of all types. From cars to airplanes to ships, they move because of fossil fuels. The time period also saw the oil industry keep up with rapid industrialization of the economy, with the growing use of fuel oil to power boilers in factories.
This chapter also highlights that the oil sector was growing, and it was no longer all about Standard Oil. We see the birth of new companies and new producing areas. No longer was Pennsylvania the center of action. During this period Texas and California came online as substantive producing areas. Unlike Pennsylvania, which has faded a bit, places like Texas and California still dominate as major US producing regions. The famous Spindletop in Texas occurred in this period. Spindletop exemplified that despite many lessons learned over time, certain things were done the “old way,” resulting in the same problems. The same issues of over-drilling and uncontrolled production that crashed the industry in Pennsylvania also hurt Spindletop. Unfortunately, those drilling at Spindletop did not learn that production rates must be controlled to maintain reservoir pressure and price stability. An interesting development as the California oil sector evolved in 1900-1911 was the use of science, specifically geology, to be more logical and accurate in searching for oil. The days of finding oil by chance gave way to using science. Geology helped explain how oil forms and where to look for it. Eventually, the “petroleum geologist” became its own profession.
As to competition, we saw the birth of many new companies that have since become iconic household names today. Shell, Gulf, Sun, and Texaco all came of age during the late 1800’s and early 1900’s. We also saw the establishment of the “integrated company” where a single entity controlled everything from getting oil out of the ground all the way through to refining and distribution.
All was not ideal as far as the general public was concerned. Rapid industrialization spawned big monopolies and giant companies. Society felt threatened and suspicious and called on the government to institute controls. Reminds us of today and big tech companies, does it not? That fear of “big oil” combined with a growth of progressivism set the government and Standard Oil on a collision course that would change the face of the industry forever. This fight was as much about socialism versus capitalism as it was about oil. Ida Tarbell’s mission to dismantle Standard Oil aligned with President Roosevelt’s belief that government need not destroy these monopolies and trusts, but should control them.
Standard Oil established a holding company, but that was not enough to insulate the company, and by 1906, the government filed a lawsuit, and in 1909, the dissolution was ordered. Interestingly, the dissolution of Standard Oil was the end of an era, and Rockefeller retired, but it also triggered a new movement. Out of the dissolution came forth a number of new smaller companies who today are great in their own right. But as we see today, over a century later, the market is still adjusting. At one time, Exxon and Mobil were powerhouses competing with each other, but now we know them as ExxonMobil. Some companies that came from Standard Oil have since disappeared.
The early 1900s was jampacked with new technology, new areas of development, new uses for the product, and a new relationship between government and big business. This dynamic relationship between government and big business exists to this day; and we see it with telecommunications, banking, technology, and others. Think of Twitter, Facebook and others.
One tried and true rule of business success, and which is clearly demonstrated in what we see in Chapter 6, is that if you invest in one part of the business, you must invest in other parts to maintain a balance. A supply with no market or way to get the product to market is not very valuable. Similarly, a market with no product quickly collapses. This “supply chain” concept became a household term recently during the COVID and immediate post-COVID period.
The birth of Royal Dutch-Shell, one of today’s largest and most iconic oil giants, illustrates this concept well. As you will read in the chapter, the evolution of Royal Dutch-Shell was a series of mergers, deals, market manipulations, and conflicts. The goal to integrate all aspects of the business as a way to make it most resilient meant pulling together oil supply, transportation options, and outlets to markets. As you read about the journey from separate Royal Dutch and Shell, through iterations of British Dutch and Asiatic, you will see how things had to adapt in order to bring in the necessary pieces. Shell is a great example of a company at death’s door being reborn as a success story by adapting to new business models and accepting reality. But the Royal Dutch-Shell story also taught us another frustrating reality in that companies continued to be undisciplined in developing fields, and as quickly as areas grew, the reservoirs lost pressure and reserves, and prices crashed due to overproduction.
In Lesson 1, we focused on the US market in the story of Standard Oil. But covering approximately at the same time period, Lesson 2 tells the story of Royal Dutch-Shell and describes the story of the Russian, European, and Far East oil markets. We must remember that we not only have huge oil reserves in the US, but also in many other parts of the world. Those regions had to go through the evolutionary process, but unlike the US markets, those markets had the added challenge of social unrest, regional wars, and extremely difficult conditions. Russia best exemplifies how social and political unrest and chaos can affect the private sector, global industry. Just because you are not government-run does not mean you are insulated from government conditions.
One final additional element we learn in Lesson 2, and something we will see continue throughout the rest of the history of the oil industry, is that multinationals were moving more widely among markets. Until now, the US market was dominated by Standard Oil and the Europe/Far East markets was by Royal Dutch-Shell. Standard Oil was known for intruding into other parts of the world, but in Lesson 2 we see Royal Dutch-Shell coming to the US, especially in California and Oklahoma.