Running Out Of Oil

Until hurricanes blew it off the front pages, the biggest economic story of the year was the rising price of oil. The media have been proclaiming gas prices to be the highest in history. In constant dollars, however, oil was more expensive as recently as 1980, when the price (in today’s money) reached almost $97 a barrel. Even Hurricane Katrina barely pushed the price above $70, and then only briefly. As a percentage of average per capita income, oil probably reached its peak price in the 1930s.

The explanation for the recent rise in the price of oil is simple: supply and demand. India and China, each with close to one-sixth of the world’s population, are now growing very fast economically, and both have limited domestic oil resources. Thus both have been buying more and more oil on the world market as their economies expand, soaking up more and more of the available supply. It is Economics 101 that when demand rises more swiftly than supply, the price must increase.

But rising prices have very predictable economic effects. For one thing, consumers begin to conserve. Drivers take fewer trips. Householders turn down the thermostat. And wells that were only marginally profitable reopen. Idle oil rigs get rented as wildcatting increases. Exploration for new fields is funded.

But here oil has a problem. If there were suddenly an increased demand for, say, chocolate bars, the candy factories of the world would simply begin cranking out more of them.

But oil isn’t chocolate bars. Oil has to be found and then it has to be refined. Both exploration and the building of refineries are technically challenging, hugely expensive, and very time-consuming. It can take a decade or more before a major new oil field can be fully exploited. A new refinery can cost five billion dollars and take five years to build. Despite constantly rising demand, there has not been a new refinery built in the United States since the 1970s.

So while world demand for oil has tended to rise steadily, the supply needed to keep prices even has risen only in fits and starts, sometimes behind demand and sometimes ahead of it. The inevitable result is volatile prices, and this, volatility has caused some experts to periodically declare an impending end of the age of oil ever since Edwin Drake sank his first wells in Pennsylvania in 1859.

The oil industry was born out of another effect of rising prices: the search for substitutes. Big cities in the mid-nineteenth century were increasingly illuminated by coal gas, made by heating coal in the absence of air. The resulting gas was sent by pipe to customers. But people in the countryside weren’t near enough to coal gas plants to use gaslight. Instead they largely used whale oil for illumination.

As the demand for lighting increased and the number of whales in the world’s oceans declined, the price of whale oil rose steadily. By the mid-1850s it was as high as $2.50 a gallon at a time when a worker earned $5.00 a week. Other illuminants were tried. Camphene, derived from turpentine, was an excellent fuel for lamps but had a nasty habit of exploding. Kerosene, which does not explode, can be made from coal tar (what’s left after the gas for gaslight has been extracted), but it was expensive to do so. With no hope of new supplies of whale oil, something else was needed. A businessman named George Bissell decided it might be “rock oil.”

Petroleum (the word comes from the Latin and means “rock oil”) has been known since ancient times, for it bubbles up from the ground naturally in many areas. One of those places was northwestern Pennsylvania, where it could be skimmed off the waters of Oil Creek, which flows into the Allegheny River.

In 1853 Bissell, a Dartmouth graduate, was visiting his old school when he noticed a bottle of Pennsylvania rock oil in a chemistry lab and wondered if it might be a source for an illuminant. He formed a company of investors and asked Professor Benjamin Silliman, Jr., of Yale to explore how to derive useful products from the rock oil. Silliman soon discovered that various liquid fuels, including kerosene, could be made from petroleum by simple distilling methods. “Gentlemen,” he told Bissell and his investors, “it appears to me that there is much ground for encouragement in the belief that your Company have in their possession a raw material from which by simple and not expensive processes, they may manufacture very valuable products.” Deeply impressed with the possibilities he saw, Silliman even put his money where his mouth was and bought 200 shares of Bissell’s new company.

Bissell was now sure there would be good demand for rock oil, but what he didn’t yet have was a steady supply. Petroleum in quantities sufficient to distill efficiently into kerosene couldn’t be skimmed off ponds and streams. Then one hot summer day in New York City, Bissell was standing in the shade of a druggist’s awning when he noticed an advertisement for a patent medicine made from rock oil. The picture showed several derricks of the kind used for boring for salt (the oil used in the medicine happened to be a byproduct of a salt well). Bissell wondered if it was possible to drill for oil.