Running Out Of Oil

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Bissell hired Edwin Drake and sent him to Pennsylvania. Drake, with considerable difficulty, finally found salt drillers willing to drill for oil, widely regarded as a nutty notion. On August 27, 1859, he struck oil outside Titusville, Pennsylvania, at 69 feet. He quickly attached to the well an ordinary hand pump, such as were then to be found on every farm, and began to pump up what seemed like an unlimited quantity of oil. Soon Drake’s problem was not finding oil but finding enough barrels to store it in.

Word quickly spread that “the Yankee has struck oil,” and thousands of men poured into the oil region and began drilling on their own. Within 15 months there were some 75 producing wells.

Pennsylvania produced 450,000 barrels of oil in 1860. At first the market was happy to take all the oil that could be produced, and prices topped $10 a barrel (around $150 in today’s money) by January 1861. As more oil came online, however, supply began to outstrip demand, and the price crashed. It was only 50 cents a barrel by June and 10 cents by the end of the year, far less than the cost of the barrel itself.

But with the supply of Southern turpentine for making camphene cut off by the Civil War and with burgeoning exports to Europe, prices recovered and reached $7.25 by September 1863. By the end of the war the price reached $13.75, and more speculators and prospectors poured into northwestern Pennsylvania.

In the tiny town of Pithole the first oil well was drilled in January 1865. More and more wells came in, and by September the town was pumping 6,000 barrels a day, two-thirds of the total Pennsylvania production. A Pithole farm, considered virtually worthless for agriculture, sold for two million dollars in that month. Then, a couple of months later, the wells suddenly gave out. By early 1866 Pithole was a ghost town.

Oilmen worried that what had happened in Pithole could happen elsewhere. Would the whole Pennsylvania oil region dry up? It was at the time the only producing oil field in the world, and the study of the geology of oil was in its infancy. No one knew how to determine proven reserves. Because of the fear, and with the price of oil fluctuating wildly as supply and demand continued out of sync, most early refineries were ramshackle affairs, often built with borrowed money. Many people in the oil business were afraid to invest for the long term.

But one young man was not afraid. He decided from the beginning that his refineries would be state of the art, despite the expense, so as to be the low-cost producers. Further, instead of taking the money and running, he maintained a strong cash position both to weather downturns and to take advantage of them to snap up failing competitors.

In effect, he bet the ranch that the oil business was just at the beginning of what would prove a long and profitable history. He was right. His name was John D. Rockefeller.