The Early American Oil Markets (Part 1)
Vicissitudes of capital in Pennsylvania's Oil Region
For an American oil industry to emerge in the 1860s, a number of factors had to already be in place. First, there had to be an existing and substantial demand for oil. While petroleum has been exploited by humans for millennia, prior to the mid-19th century its utility was limited, primarily for things like ship caulking, waterproofing, and medicine. All of these end uses were able to satisfied with marginal quantities of oil; hence, there was little need for its industrialization. In the early 1850s, however, Samuel Kier of Pittsburgh managed to refine “rock oil” into kerosene. As a light, odorless illuminant that burned brightly and consistently, kerosene was quickly recognized as a desirable replacement for whale oil, the stocks of which were in rapidly decline as a result of overfishing in the preceding decades.
So, with this new end use, sufficient demand existed for industrialization; however, in the 1850s there was still no reliable method of extracting commercial quantities of oil. Crude oil was either collected as an accidental byproduct of brine well drilling, or else it was skimmed by hand and rag off the surface of waterways that petroleum seeps sometimes fed into—a common sight, for instance, in the Oil Creek of northwestern Pennsylvania. Both of these methods were too labor-intensive to compete with camphene, a pungent but nevertheless much cheaper illuminant distilled from turpentine which served as the other major alternative to whale oil available at the time. After several years of attempts, however, “Colonel” Edwin Drake finally managed to develop a structurally sound cast iron oil well in 1869, successfully extracting crude oil from 69.5 feet below the banks of Oil Creek near Titusville, Pennsylvania.
Thus, we have at the beginning of the 1860s both the sufficient demand and the technological means to industrialize the production of oil. As conventional oil books have it, the rest was history. But of course you do not just need means and want to make an oil industry; you also need idle capital to finance oilfield development and you need labor available to work on oil lands. Here, it is important to remember that northwestern Pennsylvania, the site of the first American oil boom, is hundreds of miles away from major East Coast cities like New York, Philadelphia, and Baltimore, where labor and capital were much more highly concentrated. How and why, then, did labor and capital migrate westward into the oil patch?
Free Labor and Idle Capital Flood into the Oil Region
For one, laborers were not simply compelled to travel to oil country because they inherently realized its value as an illuminant. Though a common theme in newspapers of the time, fantasies of common folk getting rich off ‘black gold’ presumes rather than explains their precarity. People, in other words, weren’t just drawn toward northwestern Pennsylvania because they thought they could become wealthy but, perhaps more importantly, because they were already poor. Edmund Morris, an early traveler to Pennsylvanian oil country, evocatively characterizes the laboring population that existed there:
Broken-down merchants from the north, young men without means, are often content to come here and accept the lowest situations, in order to watch for chances. A floating population of from forty to fifty thousand people wanders through the territory in sleighs, wagons, horseback and on foot, carrying carpet-bags, keeping their ears and eyes open, and ready at any moment for a ‘flyer.’ (1865, pp. 264-265)
Hence, the flooding of labor into the Oil Region was the result of processes of dispossession which were already well in force in the mid-19th century. In addition to Morris’ “broken-down merchants,” this reserve army of labor roaming across oil country included thousands of decommissioned soldiers who had become free laborers after the end of the Civil War, and who had little interest or luck readjusting to urban life. This is important to bear in mind, as it is a very understated aspect of the emergence of the American oil industry: by and large, it is not greed that motivates people to uproot their livelihoods and travel to the hinterlands. Rather, such livelihoods were much more often already uprooted.
As for capital’s march into the oil patch, Civil War-era policies—again independent of the dynamics developing in the Oil Region—played a key albeit underemphasized role. For one, the US Treasury’s minting of $400 million greenbacks to finance the war effort fueled land speculation after the war, and especially across Pennsylvania, Ohio, and West Virginia in the earliest days of the oil boom. “Prices for oil lands rose to dizzying heights; speculators often transacted business in cash to the tune of $50,000 or $100,000” (Lucier, 2008, p. 246). But what had really turned the country’s first oil boom into an “unparalleled, commercial epidemic” was the introduction of interstate joint-stock companies. Prior to the Civil War, most states in the Union required a lengthy and cumbersome chartering process for the incorporation of businesses, and Pennsylvania in particular prohibited out-of-state firms from owning any property in-state. In the early 1860s, however, laws passed in Pennsylvania both allowed out-of-state residents to own land and also simplified the process of business chartering. This, in turn, opened up new financial channels for capital to flow from East Coast cities into the inchoate oil country.
William Culp Darrah provides an illuminating account of the frenzy of oil capital that had been facilitated by this rush toward joint-stock incorporation: “In a single week in March, 1865 in New York, Boston, Baltimore and Philadelphia,” he writes, “twenty new oil companies were organized with an aggregate capital of $12,500,000” (1972, p. 16). By the end of that year, at least $326 million had been invested by Northern cities into the oil industry, with the vast bulk of that money coming from Philadelphia ($163.7 million) and New York ($134 million) (Morris, 1865, p. 258).[1] Notably, stock issuing made it possible for such funds to not only be provided by wealthy financiers but also working and middle class urbanites, whose interest in capitalizing on the oil industry had been fomented by the “ceaseless sensationalism” being sold by the press, running story after story of the excitingly topsy-turvy contours of oil country, where men of no social status could become millionaires overnight (see also Lucier, 2008, p. 247). In order to assist urban families of lesser means live vicariously through these same fantasies from hundreds of miles away, oil companies deliberately inflated stock volumes such that the shares could be sold at prices working class families could afford, as low as twenty-five cents: “The cook and chambermaid who had only ten dollars to invest, had now the opportunity of becoming rich” (Morris, 1865, p. 253).
While these funds, both those from financiers and those drawn from worker incomes, certainly served as fresh sources of productive capital, it is important to note that many of these joint-stock oil companies had little to no interest in actually developing oilfields. Instead, they raised capital purely for the purpose of speculating on leases. A notable example of an oil company capitalizing on leases was the United States Petroleum Company, which had once disposed in a single day sixty of its eighty owned leases upon discovery of oil on a single tract. The company sold for an average price of $3,000 per lease and netted more than $176,000. The organizers, as Darrah writes, “cared little about finding oil. They were selling stock. Oil or not made no difference. What they had to do was drill a well to satisfy stockholders” (1972, p. 10). Hence, the sheer liquidity of land markets only further exacerbated ‘oil fever’, insofar as every new oil strike would raise the market price of leases not merely because of the possibility of finding oil in bordering parcels but also as a result of the latter’s ‘investment demand’, i.e. the lease became, in itself, an appreciating asset.
Another, less risky way in which oil companies kept their funds in circulation—that is, rather than invest it in oil production—was by being the first mover into a new prospect, assembling large tracts of land, and then subleasing parcels to operators, thereby “recovering almost at once their investments and in many cases reaping fortunes merely by speculating in leases” (Darrah, 1972, pp. 16-17). Hence, the strategy here was to siphon rent from the original landowner while deferring the risks of both lease holding and oilfield development onto the forward counterparty, typically a wildcatter or small-scale producer.
In all, land speculation greatly increased the overall velocity of money: “Land bought one day has sometimes realized five, ten, twenty times the amount paid for it within a day or a week following” (Morris, 1865, p. 256). Indeed, speculative activity in land markets made leases so expensive that small investors could not afford to develop their own leases even if they wanted to. Instead, they were forced to resort to acquiring “fractions of an interest” in a single well, “which might be flowing, pumping, going down, getting started, or none of the above” (Lucier, 2008, p. 247).
And, as the relationship between land markets and the ‘real’ supply and demand of oil was loosened, swindling became all that much easier. Lease traders, for instance, took great advantage of the fact that the price of acreage would rise not just because of a definitive new discovery of oil nearby but purely on account of market activity, i.e. leases being bought and sold, such that ‘pump and dump’ schemes became a standard part of doing business: Edmund Morris writes of a “known case” where a speculator would rapidly buy up productive lands only in order to sell nearby less productive land for “ten times the sum which he had given for ten times the quantity, being thousand per cent advance” (1865, p. 261).
Joint-stock companies became an ideal vessel for such sleights of hand, insofar as the nationwide hype around the oil industry in the 1860s allowed companies to accrue great magnitudes of liquidity without any prospect or even intent of paying dividends. Indeed, many of these joint-stock companies
had no real value. Their lands, where any title to land really exists, have no indication of the presence of oil in quantities to warrant boring. The only object of their existence was the creation of shares to be sold at a profit by the sharp-witted projectors. The originators of such companies are moral swindlers, and only evade the legal responsibilities of actual swindling by the ingenuity with which their ‘prospectuses’ are framed. (Bone, 1865, pp. 146-147)
Attempting to remedy this situation, lawyers from New York and Philadelphia were often recruited by wealthier stockholders to investigate the legality of their holdings. When lawyers went to investigate, however, they often found that the company issuing the stock not only did not have any legal claim to oil interests but did not even exist: “There are no doubt many other stocks that are really worth all, and more than they bring in the market, if the price of oil continues as it now is. But it takes great knowledge and experience of the innermost matters of these companies, to know what is good and what is fraudulent” (Morris, 1865, p. 261). “As in other things,” a contemporary had written, in oil companies “there is the good and the evil—the true and the false” (Eaton, 1866, p. 245).
Ironically, then, lowering the barriers to entry by simplifying the process of incorporation, allowing out-of-state landownership, and encouraging public investment via stock offerings did not ‘democratize’ oil markets so much as further exacerbate economic inequality—not only within the Oil Region but across the northern United States. Unsurprisingly, the press tended to blame economic hardship on the imprudent financial decisions of individual investors: “It is astonishing to see,” reads one news article, “how many persons will come boldly up and invest hundreds and thousands of dollars in oil-stocks, without any positive knowledge of the value of the property in which they invest” (qtd. in Morris, 1865, p. 264). But, once again, it was not only wealthy financiers who got caught up in the frenzy. Enticed by both the “sensationalist” press and countless fake joint-stock oil companies, thousands of working class families were sold fantasies of quick riches that could and would never materialize.
Infrastructural Limits to the Financialization of the Early Oil Markets
Beyond land markets, the incentive to financialize the commodity itself—that is, barrels of oil—was also realized from very early on, indeed essentially since the inception of the modern American oil industry. The problem was fairly straightforward: “Since the first discovery of oil in 1859, U.S. crude oil output and prices followed cycles with prices falling as new fields were discovered and drained and then rising as supplies again became tight” (Libecap, 1989, p. 835). Hence, productive capital faced immense price risk in the oil patch, as month-to-month it was extremely difficult to tell if the return on investment would be profitable. Further, and precisely because of the predominance of joint-stock companies in the oil industry, oil prices and stock prices tended to move in tandem. The steep downturn in oil prices in April 1865, for instance, was mirrored in an oil stock crash reported to have “destroyed $2,000,000 of property in Oil City alone” (Morris, 1865, p. 276). Such risks were intolerable to wealthy financiers, and new financial mechanisms to secure investments were therefore quickly pursued.
But the central issue was that, unlike the stock market, the oil market was at the outset extremely illiquid, and this made financial instruments for the securitization of the oil trade very difficult to implement. Indeed, the first oil “market” was not so much a market at all but a “simple matter of barter between the producer and the refiner or his agent, and the price and terms were arrived at by mutual agreement” (Boyle, 1915, p. 8). In such informal, bilateral exchanges, oil barrels were not even standardized—in the earliest days, oil was transported in spare old whiskey or wine barrels (McNally, 2017, p. 15)—such that many had “excess gallonage over the registered capacity, resulting in bickerings and a demand for an honest barrel” (Boyle, 1915, p. 8). The construction of the Oil Creek and Framers railroad in 1866 saw somewhat more orderliness and formalization of a market, as specially designated passenger cars became a place where oil men congregated to trade. “Strictly speaking,” this was “the first oil exchange in the region. There were no officers nor governing rules; but in those days the word of an oil man was considered as good as his bond” (Bell, 1890, p. 519).
A more formal, centralized commodity exchange would emerge only after the introduction of a more standardized means of transportation. Indeed, in addition to the price risk associated with the boom and bust cycle of oil discoveries, early oil markets were highly vulnerable to the physical precarity of the methods available to transport oil (Barbour, 1928, p. 127). Oil Creek, after all, is situated in the backwoods of northwestern Pennsylvania, with the first railroads servicing Titusville only being built in the mid-1860s (Bell, 1890, p. 508). Before this, oil extracted along Oil Creek had to be carted out by teamsters on horseback. Most often, the teamsters took oil to Titusville, where it was then shipped down Oil Creek (Darrah, 1972, p. 100). At the meeting point of Oil Creek and the Allegheny River rests Oil City, where oil was placed onto larger barges which navigated down the Allegheny and delivered the oil to refineries in Pittsburgh and Cleveland.
Inclement weather could greatly restrict this lengthy chain of oil transportation, with winters freezing creeks and rivers and rainstorms muddying the roads to the point of impassability for the teamsters’ horses. To this point, Hebert Bell recounts three illustrative disasters, all of which occurred in the 1860s. First, on Sunday, December 7th, 1862, there was the deluge of a great “ice-gorge” (1890, pp. 511-512). In the weeks prior, an extraordinarily large number of barges were stationed at the Oil City wharf, carrying barrels of oil which had been purchased earlier in the year. They had been waiting for the first flood rise to be able to make it back to Pittsburgh. On the Friday before December 7th, snow began to fall, and a subsequent cold snap on Saturday morning froze the rivers, which closed down all water traffic. In defiant insubordination, however, renegade ice blocks congregated along the Allegheny River upstream of Oil City, forming a dam which backed up the river until at one point built up pressure gave way to a massive torrent. An “ice-gorge” befell Oil City, destroying 200 boats and emptying tens of thousands of barrels of oil into the river.
A second disaster occurred on Tuesday, May 31st, 1864, when a traffic jam on Oil Creek resulted in a crash which tipped over fifteen thousand barrels of oil. The water became so thick with oil that it gave some entrepreneurially minded oil men a ‘new’ idea: skimming oil off the surface of the creek, just like the olden days. Some managed to do so quite lucratively, selling 50 to 100 barrels per day. Even still, the spill led to fears of scarcity on the market, pushing the price of oil in Oil City up from $7.75/bbl to $17/bbl (ibid., p. 513). Last but not least, there was the “great flood” of March 1865. Days of heavy rain led to a flash flood in Oil City which dragged trees, tanks, boilers, houses, and oil boats along with it. In the end, at least one man had been killed, dozens of houses destroyed, innumerable wells on the riverbank lost, and sixty thousand barrels of oil spilled out into the creek (ibid., p. 514).
In Part II, I will show how it was precisely the development of the first pipelines in the Oil Region which made possible the financialization of the early oil trade. Namely, what this new infrastructure allowed for was 1) protection of oil’s physical circulation against the uncertainties of weather, and 2) the standardization of oil contracts through financial instruments known as “pipeline certificates,” which were issued by the pipeline companies. That said, I will also show how the subsequent emergence of oil futures markets, dubbed “petroleum exchanges,” became the basis not for a reduction of price risk but itself introduced even more rampant speculation, market gaming, and, in turn, price volatility. Finally, I will explain how Standard Oil’s monopolization of the refining industry allowed the company to unilaterally squash these first petroleum exchanges by the 1890s. In 1869, John D. Rockefeller had reportedly said, “the oil business is mine” (qtd. in Klein, 1914, p. 12). By the end of the century, this was beyond dispute, at least in the United States.
[1] Morris notes that these figures do not include an addition of at least another $100 million coming from private enterprises which were not publicly traded (1865, p.258).
References
Barbour, John B. 1928. “Sketch of the Pittsburgh oil exchanges.” Western Pennsylvania Historical Magazine 11(3), pp. 127-143.
Bell, Herbert Charles. 1890. History of Venango Country, Pennsylvania, and Incidentally of Petroleum, together with Accounts of the Early Settlements and Progress of Each Township, Borough and Village, with Personal and Biographical Sketches of the Early Settlers, Representative Men, Family Records, Etc. Chicago, Brown, Runk & Co, Publishers.
Bone, J.H.A. 1865. Petroleum and Petroleum Wells. What Petroleum Is, Where It Is Found, and What It Is Used for; Where to Sink Petroleum Wells, and How to Sink Them. With a Complete Guide Book and Descriptions of the Oil Regions of Pennsylvania, West Virgnia, Kentucky and Ohio (2nd edition). Philadelphia, J.B. Lippincott & Co.
Boyle, P.C. 1915. “Publisher’s Announcement.” In Tennent, James C. The Oil Scouts: Reminiscences of the Night Riders of the Hemlocks. Derrick Publishing Company, pp. 7-12.
Darrah, William Culp. 1972. Pithole, the Vanished City: A Story of the Early Days of the Petroleum Industry. Self-published.
Eaton, S.J.M. 1866. Petroleum: A History of the Oil Region of Venango County, Pennsylvania. Its Resources, Mode of Development, and Value: Embracing a Discussion of Ancient Oil Operations; with a Map, and Illustrations of Oil Science and Boring Implements. Philadelphia, J.P. Skelly & Co.
Klein, Henry H. 1914. Standard Oil or the People. New York, self-published.
Libecap, Gary D. 1989. “The political economy of crude oil cartelization in the United States, 1933-1972.” The Journal of Economic History 49 (4), pp. 833-855. https://doi.org/10.1017/S0022050700009463
Lucier, P. 2008. Scientists and Swindlers: Consulting on Coal and Oil in America, 1820-1890. Baltimore, The Johns Hopkins University Press. https://doi.org/10.1353/book.3500
McNally, Robert. 2017. Crude Volatility: The History and the Future of Boom-Bust Oil Prices. New York, Columbia University Press.
Morris, Edmund. 1865. Derrick and Drill, or an Insight into the Discovery, Development, and Present Condition and Future Prospects of Petroleum, in New York, Pennsylvania, Ohio, West Verginia, &c. New York, James Miller.