The most important and most overlooked energy issue today is the growing crisis of global energy supply. Cheap, industrial-scale energy is essential to building, transporting, and operating everything we use, from refrigerators to Internet server farms to hospitals. It is desperately needed in the undeveloped world, where 1.6 billion people lack electricity, which contributes to untold suffering and death. And it is needed in ever-greater, more-affordable quantities in the industrialized world: Energy usage and standard of living are directly correlated.1
Every dollar added to the cost of energy is a dollar added to the cost of life. And if something does not change soon in the energy markets, the cost of life will become a lot higher. As demand increases in the newly industrializing world, led by China and India,2 supply stagnates3—meaning rising prices as far as the eye can see.
What is the solution?
We just need the right government “energy plan,” leading politicians, intellectuals, and businessmen tell us. Of course “planners” such as Barack Obama, John McCain, Al Gore, Thomas L. Friedman, T. Boone Pickens, and countless others favor different plans with different permutations and combinations of their favorite energy sources (solar, wind, biomass, ethanol, geothermal, occasionally nuclear and natural gas) and distribution networks (from decentralized home solar generators to a national centralized so-called smart grid). But each agrees that there must be a plan—that the government must lead the energy industry using its power to subsidize, mandate, inhibit, and prohibit. And each claims that his plan will lead to technological breakthroughs, more plentiful energy, and therefore a higher standard of living.
Consider Nobel Peace Prize winner Al Gore, who claims that if only we follow his “repower American plan”—which calls for the government to ban and replace all carbon-emitting energy (currently 80 percent of overall energy and almost 100 percent of fuel energy)4 in ten years—we would be using
fuels that are not expensive, don’t cause pollution and are abundantly available right here at home. . . . We have such fuels. Scientists have confirmed that enough solar energy falls on the surface of the earth every 40 minutes to meet 100 percent of the entire world’s energy needs for a full year. Tapping just a small portion of this solar energy could provide all of the electricity America uses.
And enough wind power blows through the Midwest corridor every day to also meet 100 percent of US electricity demand. Geothermal energy, similarly, is capable of providing enormous supplies of electricity for America. . . . [W]e can start right now using solar power, wind power and geothermal power to make electricity for our homes and businesses.5
And Gore claims that, under his plan, our vehicles will run on “renewable sources that can give us the equivalent of $1 per gallon gasoline.”6
Another revered thinker, Thomas L. Friedman, also speaks of the transformative power of government planning, in the form of a government-engineered “green economy.” In a recent book, he enthusiastically quotes an investor who claims: “The green economy is poised to be the mother of all markets, the economic investment opportunity of a lifetime.”7 Friedman calls for “a system that will stimulate massive amounts of innovation and deployment of abundant, clean, reliable, and cheap electrons.”8 How? Friedman tells us that
there are two ways to stimulate innovation—one is short-term and the other is long-term—and we need to be doing much more of both. . . . First, there is innovation that happens naturally by the massive deployment of technologies we already have [he stresses solar and wind]. . . . The way you stimulate this kind of innovation—which comes from learning more about what you already know and doing it better and cheaper—is by generous tax incentives, regulatory incentives, renewable energy mandates, and other market-shaping mechanisms that create durable demand for these existing clean power technologies. . . . And second, there is innovation that happens by way of eureka breakthroughs from someone’s lab due to research and experimentation. The way you stimulate that is by increasing government-funded research. . . .9
The problem with such plans and claims: Politicians and their intellectual allies have been making and trying to implement them for decades—with nothing positive (and much negative) to show for it.
For example, in the late 1970s, Jimmy Carter heralded his “comprehensive energy policy,” claiming it would “develop permanent and reliable new energy sources.” In particular, he (like many today) favored “solar energy, for which most of the technology is already available.” All the technology needed, he said, “is some initiative to initiate the growth of a large new market in our country.”10
Since then, the government has heavily subsidized solar, wind, and other favored “alternatives,” and embarked on grand research initiatives to change our energy sources—claiming that new fossil fuel and nuclear development is unnecessary and undesirable. The result? Not one single, practical, scalable source of energy. Americans get a piddling 1.1 percent of their power from solar and wind sources,11 and only that much because of national and state laws subsidizing and mandating them. There have been no “eureka breakthroughs,” despite many Friedmanesque schemes to induce them, including conveniently forgotten debacles such as government fusion projects,12 the Liquid Fast Metal Breeder Reactor Program,13 and the Synfuels Corporation.14
Many good books and articles have been written—though not enough, and not widely enough read—chronicling the failures of various government-sponsored energy plans, particularly those that sought to develop “alternative energies,” over the past several decades.15 Unfortunately, the lesson that many take from this is that we must relinquish hope for dramatic breakthroughs, lower our sights, and learn to make do with the increasing scarcity of energy.
But the past failures do not warrant cynicism about the future of energy; they warrant cynicism only about the future of energy under government planning. Indeed, history provides us ample grounds for optimism about the potential for a dynamic energy market with life-changing breakthroughs—because America once had exactly such a market. For most of the 1800s, an energy market existed unlike any we have seen in our lifetimes, a market devoid of government meddling. With every passing decade, consumers could buy cheaper, safer, and more convenient energy, thanks to continual breakthroughs in technology and efficiency—topped off by the discovery and mass availability of an alternative source of energy that, through its incredible cheapness and abundance, literally lengthened and improved the lives of nearly everyone in America and millions more around the world. That alternative energy was called petroleum. By studying the rise of oil, and the market in which it rose, we will see what a dynamic energy market looks like and what makes it possible. Many claim to want the “next oil”; to that end, what could be more important than understanding the conditions that gave rise to the first oil?
Today, we know oil primarily as a source of energy for transportation. But oil first rose to prominence as a form of energy for a different purpose: illumination.
For millennia, men had limited success overcoming the darkness of the night with man-made light. As a result, the day span for most was limited to the number of hours during which the sun shone—often fewer than ten in the winter. Even as late as the early 1800s, the quality and availability of artificial light was little better than it had been in Greek and Roman times—which is to say that men could choose between various grades of expensive lamp oils or candles made from animal fats.16 But all of this began to change in the 1820s. Americans found that lighting their homes was becoming increasingly affordable—so much so that by the mid-1860s, even poor, rural Americans could afford to brighten their homes, and therefore their lives, at night, adding hours of life to their every day.17
What made the difference? Individual freedom, which liberated individual ingenuity.
The Enlightenment and its apex, the founding of the United States of America, marked the establishment of an unprecedented form of government, one established explicitly on the principle of individual rights. According to this principle, each individual has a right to live his own life solely according to the guidance of his own mind—including the crucial right to earn, acquire, use, and dispose of the physical property, the wealth, on which his survival depends. Enlightenment America, and to a large extent Enlightenment Europe, gave men unprecedented freedom in the intellectual and economic realms. Intellectually, individuals were free to experiment and theorize without restrictions by the state. This made possible an unprecedented expansion in scientific inquiry—including the development by Joseph Priestly and Antoine Lavoisier of modern chemistry, critical to future improvements in illumination.18 Economically, this freedom enabled individuals to put scientific discoveries and methods into wealth-creating practice, harnessing the world around them in new, profitable ways—from textile manufacturing to steelmaking to coal-fired steam engines to illuminants.
There had always been a strong desire for illumination, and therefore a large potential market for anyone who could deliver it affordably—but no one had been able to actualize this potential. In the 1820s, however, new scientists and entrepreneurs entered the field with new knowledge and methods that would enable them to harness nature efficiently to create better, cheaper illuminants at a profit. Contrary to those who believe that the government is necessary to stimulate, invest in, or plan the development of new energy sources, history shows us that all that is required is an opportunity to profit.
That said, profiting in the illumination industry was no easy task. The entrenched, animal-based illuminants of the time, whatever their shortcomings, had long histories, good reputations, refined production processes, established transportation networks and marketing channels, and a large user base who had invested in the requisite lamps. In other words, animal-based illuminants were practical. For a new illumination venture to be profitable, it would have to create more value (as judged by its customers) than it consumed. A successful alternative would not only have to be a theoretical source of energy, or even work better in the laboratory; it would have to be produced, refined, transported, and marketed efficiently—or it would be worthless. Unlike today, no government bureaucrats were writing big checks for snazzy, speculative PowerPoint presentations or eye-popping statistics about the hypothetical potential of a given energy source. Thus, scientists and entrepreneurs developed illumination technologies with an eye toward creating real value on the market. They began exploring all manner of potential production materials—animal, vegetable, and mineral—and methods of production and distribution. Many of their attempts failed, such as forays into fish oils and certain plant oils that proved unprofitable for reasons such as unbearable smell, high cost of mass production, and low-quality light.19 But, out of this torrent of entrepreneurial exploration and experimentation, three illumination breakthroughs emerged.
One, called camphene, came from the work of the enterprising scientist Isaiah Jennings, who experimented with turpentine. If turpentine could create a quality illuminant, he believed, the product held tremendous commercial potential as the lowest-cost illuminant on the market: Unlike animal fat, turpentine was neither in demand as a food product nor as a lubricant. Jennings was successful in the lab, and in 1830, he took out a patent for the process of refining turpentine into camphene. The process he patented was a form of distillation—boiling at different temperatures in order to separate different components—a procedure that is vital to the energy industry to this day.
Before camphene could succeed on the market, Jennings and others had to solve numerous practical problems. For example, they discovered that camphene posed the threat of explosion when used in a standard (animal) oil lamp. The initial solution was to design new lamps specifically for use with camphene—but this solution was inadequate because the money saved using camphene would barely defray the expense of a new lamp. So, producers devised methods that enabled customers to inexpensively modify their existing lamps to be camphene-safe. The payoff: In the 1840s, camphene was the leading lamp oil, while use of animal oils, the higher-cost product, as illuminants declined in favor of their use as lubricants. Camphene was the cheapest source of light to date, creating many new customers who were grateful for its “remarkable intensity and high lighting power.”20
Second, whereas Jennings had focused on developing a brand-new source of illumination, another group of entrepreneurs—from, of all places, the Cincinnati hog industry—saw an opportunity to profitably improve the quality of light generated from animal lard, an already widely used source of illumination. At the time, the premium illuminant in the market was sperm whale oil, renowned for yielding a safe, consistent, beautiful light—at prices only the wealthy could afford. In the 1830s, soap makers within the hog industry set out to make traditional lard as useful for illumination as the much scarcer sperm whale oil. They devised a method of heating lard with soda alkali, which generated two desirable by-products that were as good as their sperm equivalents but less expensive: a new lard oil, dubbed stearin oil, for lamps and stearic acid for candles. This method, combined with a solid business model employing Cincinnati’s feedstock of hogs, created a booming industry that sold 2 million pounds of stearin products annually. The price of stearin oil was one third less than that of sperm whale oil, making premium light available to many more Americans.21
Thus camphene and stearin became leaders in the market for lamps and candles—both portable sources ofillumination. The third and final new form of illumination that emerged in the early 1800s was a bright, high-quality source of illumination delivered via fixed pipes to permanent light fixtures installed in homes and businesses. In the 17th century, scientists had discovered that coal, when heated to extremely high temperatures (around 1600 degrees), turns into a combustible gas that creates a bright light when brought to flame. In 1802, coal gas was used for the first time for commercial purposes in the famous factory of Boulton & Watt, near Birmingham, England.22 Soon thereafter, U.S. entrepreneurs offered coal gas illumination to many industrial concerns—making possible a major extension of the productive day for businesses, and thus increasing productivity throughout American industry. Initially, the high cost of the pipes and fixtures required by gas lighting precluded its use in homes. But entrepreneurs devised more efficient methods of installing pipes in order to bring gas into urban homes, and soon city dwellers in Baltimore, Boston, and New York would get more useful hours out of their days. Once the infrastructure was in place, the light was often cheaper than sperm whale oil, and was reliable, safe, and convenient. As a result, during the 1830s and 1840s, the coal-gas industry grew at a phenomenal rate; new firms sprang up in Brooklyn, Bristol (Rhode Island), Louisville, New Orleans, Pittsburgh, and Philadelphia.23
By the 1840s, after untold investing, risk-taking, thinking, experimentation, trial, error, failures, and success, coal gas, camphene, and stearin producers had proven their products to be the best, most practical illuminants of the time—and customers eagerly bought them so as to bring more light to their lives than ever before.
But this was only the beginning. Because the market was totally free, the new leaders could not be complacent; they could not prevent better ideas and plans from taking hold in the marketplace. Unlike the static industries fantasized by today’s “planners,” where some government-determined mix of technologies produces some static quantity deemed “the energy Americans need,” progress knew no ceiling. The market in the 19th century was a continuous process of improvement, which included a constant flow of newcomers who offered unexpected substitutes that could dramatically alter Americans’ idea of what was possible and therefore what was “needed.”
In the early 1850s, entrepreneurs caused just such a disruption with a now-forgotten product called coal oil.24 Coal oil initially emerged in Europe, which at the time also enjoyed a great deal of economic freedom. Scientists and entrepreneurs in the field of illumination were particularly inclined to look for illuminants in coals and other minerals because of the relative scarcity of animal and vegetable fats, and correspondingly high prices for both. Beginning with the French chemist A. F. Selligue, and continuing with the British entrepreneur James Young, Europeans made great strides in distilling coal at low heat (as against the high heat used to create coal gas) to liquefy it, and then distilling it (as Jennings had distilled turpentine into camphene) to make lamp oil and lubricants that were just as good as those from animal sources. Coal was plentiful, easy to extract in large quantities, and therefore cheap. The primary use of coal oil in Europe, however, was as a lubricant. In North America, the primary use would be as an illuminant.
Beginning in the 1840s, a Canadian physician named Abraham Gesner, inspired by the Europeans, conducted experiments with coal and was able to distill a quantity of illuminating oil therefrom. Gesner conceived a business plan (like so many scientists of the day, he was entrepreneurial), and teamed with a businessman named Thomas Cochrane to purchase an Alberta mining property from which he could extract a form of coal (asphaltum), refine it at high quality, and sell it below the going price for camphene.
But in 1852 the project was aborted—not because the owners lost the means or will to see it through, but because the Canadian government forbade it. The government denied that the subsurface minerals belonged to those who harnessed their value; it held that they were owned by the Crown, which did not approve of this particular use.
Gesner’s experience in Canada highlights a vital precondition of the rapid development of the American illumination energy industry: the security of property rights. All of the industries had been free to acquire and develop the physical land and materials necessary to create the technologies, make the products, and bring them to market based on the entrepreneurs’ best judgment. They had been free to cut down trees for camphene, raise hogs for stearin, and mine coal and build piping for gas lighting, so long as they were using honestly acquired property. And this freedom was recognized as a right, which governments were forbidden to abrogate in the name of some “higher” cause, be it the Crown or “the people” or the snail darter or protests by those who say, “Not in my backyard” about other people’s property. Because property rights were recognized, nothing stopped them from acting on their productive ideas. Had property rights not been recognized, all their brilliant ideas would have been like Gesner’s under Canadian rule: worthless.
Not surprisingly, Gesner moved to the United States. He set up a firm, the New York Kerosene Company, whose coal-oil illuminant, kerosene, was safer and 15 percent less expensive than camphene, more than 50 percent less expensive than coal gas, 75 percent less expensive than lard oil, and 86 percent less expensive than sperm whale oil. Unfortunately, this was not enough for Gesner to succeed. His product suffered from many problems, such as low yields and bad odor, and was not profitable. However, his limited successes had demonstrated that coal’s abundance and ease of refining made it potentially superior to animal and vegetable sources.
That potential was fully actualized by a businessman named Samuel Downer and his highly competent technical partners, Joshua Merrill and Luther Atwood. Downer had devoted an existing company to harnessing a product called “coup oil,” the properties of which rendered it uncompetitive with other oils. Recognizing the hopelessness of coup oil, Downer set his sights on coal-oil kerosene. Downer’s firm made major advances in refining technology, including the discovery of a more efficient means of treating refined oil with sulfuric acid, and of a process called “cracking”—also known as “destructive distillation”—which uses high heat to break down larger molecules into smaller ones, yielding higher amounts of the desired substance, in this case kerosene. (Unbeknownst to all involved, these discoveries would be vital to the undreamed of petroleum industry, which would emerge in the near future.) By 1859, after much effort went into developing effective refining processes and an efficient business model, Downer’s firm was able to make large profits by selling kerosene at $1.35 a gallon—a price that enabled more and more Americans to light their houses more of the time. Others quickly followed suit, and by decade’s end, businessmen had started major coal-oil refineries in Kentucky, Cincinnati, and Pittsburgh. The industry had attracted millions in investment by 1860, and was generating revenues of $5 million a year via coal oil—a growing competitor to coal gas, which was generating revenues of $17 million a year and had attracted $56 million (more than $1 billion in today’s dollars) in investment.25
As the 1850s drew to a close, coal oil and coal gas were the two leading illuminants. These new technologies brightened the world for Americans and, had the evolution of illumination innovation ended here, most Americans of the time would have died content. Their quality of life had improved dramatically under this energy revolution—indeed, so dramatically that, were a comparable improvement to occur today, it would dwarf even the most extravagant fantasies of today’s central planners. This points to a crucial fact that central planners cannot, do not, or will not understand: The source of an industry’s progress is a free market—a market with real economic planning, profit-driven individual planning.
The revolution in illumination was a process of thousands of entrepreneurs, scientists, inventors, and laborers using their best judgment to conceive and execute plans to make profits—that is, to create the most valuable illuminant at the lowest cost—with the best plans continually winning out and raising the bar. As a result, the state of the market as a whole reflected the best discoveries and creativity of thousands of minds—a hyperintelligent integration of individual thinking that no single mind, no matter how brilliant, could have foreseen or directed.
Who knew in 1820 that, of all the substances surrounding man, coal—given its physical properties, natural quantities, and costs of extraction and production—would be the best source for inexpensive illumination? Who knew all the thousands of minute, efficiency-producing details that would be reflected in the operations of the Samuel Downer Company—operations developed both by the company and by decades of trial and error on the market? Consider, then, what it would have meant for an Al Gore or Thomas Friedman or Barack Obama to “plan” the illumination energy market. It would have meant pretending to know the best technologies and most efficient ways of harnessing them and then imposing a “plan.” And, given that neither Gore nor Friedman nor anyone else could possibly possess all the knowledge necessary to devise a workable plan, what would their “plan” consist of? It would consist of what all central planners’ “plans” consist of: prohibition, wealth transfers, and dictates from ignorance. Depending on when the “planners” began their meddling and who was whispering in their ear, they might subsidize tallow candles or camphene, thereby pricing better alternatives out of the market or limiting lighting choices to explosive lamps.
Thankfully, there was no such “planner”—there were only free individuals seeking profit and free individuals seeking the best products for their money. That freedom enabled the greatest “eureka” of them all—from an unlikely source.
George Bissell was the last person anyone would have bet on to change the course of industrial history. Yet this young lawyer and modest entrepreneur began to do just that in 1854 when he traveled to his alma mater, Dartmouth College, in search of investors for a venture in pavement and railway materials.26 While visiting a friend, he noticed a bottle of Seneca Oil—petroleum—which at that time was sold as medicine. People had known of petroleum for thousands of years, but thought it existed only in small quantities. This particular bottle came from an oil spring on the land of physician Dr. Francis Beattie Brewer in Titusville, Pennsylvania, which was lumber country.
At some point during or soon after the encounter, Bissell became obsessed with petroleum, and thought that he could make a great business selling it as an illuminant if, first, it could be refined to produce a high quality illuminant, and, second, it existed in substantial quantities. Few had considered the first possibility, and most would have thought the second out of the question. The small oil springs or seeps men had observed throughout history were thought to be the mere “drippings” of coal, necessarily tiny in quantity relative to their source.
But Bissell needed no one’s approval or agreement—except that of the handful of initial investors he would need to persuade to finance his idea. The most important of these was Brewer, who sold him one hundred acres of property in exchange for $5,000 in stock in Bissell’s newly formed Pennsylvania Rock Oil Company of New York.
To raise sufficient funds to complete the project, Bissell knew that he would have to demonstrate at minimum that petroleum could be refined into a good illuminant. He solicited Benjamin Silliman Jr., a renowned Yale chemist, who worked with the petroleum, refined it, and tested its properties for various functions, including illumination. After collecting a $500 commission (which the crash-strapped firm could barely put together), Silliman delivered his glowing report: 50 percent of crude petroleum could be refined into a fine illuminant and 90 percent of the crude could be useful in some form or another.
Proof of concept in hand, Bissell raised just enough money to enact the second part of his plan: to see if oil could be found in ample quantities. According to the general consensus, his plan—to drill for oil—was unlikely to uncover anything. (One of Bissell’s investors, banker James Townsend, recalled his friends saying, “Oh, Townsend, oil coming out of the ground, pumping oil out of the earth as you pump water? Nonsense! You’re crazy.”) But Bissell’s organization had reason to suspect that the consensus was wrong—mostly because saltwater driller Samuel Kier had inadvertently found modest quantities of oil apart from known coal deposits, which contradicted the coal-drippings theory. And so Bissell proceeded, albeit with great uncertainty and very little money.
He sent Edwin Drake, a former railroad conductor and jack-of-many-trades, to Titusville to find oil. Drake and his hired hands spent two years and all the funds the company could muster, but after drilling to 69.5 feet with his self-made, steam-powered rig, he found nothing. Fortunately, just as the investors told Drake to wrap up the project, his crew noticed oil seeping out of the rig. Ecstatic, they attempted to pump the oil out of the well—and succeeded. With that, a new industry was born.
That is, a new potential industry was born. In hindsight we know that oil existed in quantities and had physical qualities that would enable it to supplant every other illuminant available at the time. But this was discovered only later by entrepreneurs with the foresight to invest time and money in the petroleum industry.
Bissell and other oilmen faced a difficult battle. They had to extract, refine, transport, and market at a profit this new, little-understood material, whose ultimate quantities were completely unknown—while vying for market share with well-established competitors. Fortunately, they were up to the task, and many others would follow their lead.
When word got out about Drake’s discovery, a “black gold” rush began, a rush to buy land and drill the earth for as much of this oil as possible. For example, upon seeing Drake’s discovery, Jonathan Watson, a lumber worker on Brewer’s land, bought what would become millions of dollars worth of oil land. George Bissell did the same. Participants included men in the lumber industry, salt borers turned oil borers, and others eager to take advantage of this new opportunity.27
Progress in this new industry was messy and chaotic—and staggering. In 1859, a few thousand barrels were produced; in 1860, more than 200,000; and in 1861, more than 2 million.28 Capital poured in from investors seeking to tap into the profits. In the industry’s first five years, private capitalists invested $580 million—$7 billion in today’s dollars.29 Even in the middle of the 19th century, when wealth was relatively scarce, the supposed problem of attracting capital to fund the development of a promising energy source did not exist so long as the energy source was truly promising.
As producers demonstrated that enormous quantities of oil existed, they created a huge profit opportunity for others to build businesses performing various functions necessary to bring oil to market. At first, would-be transporters were hardly eager to build rail lines to Titusville, and would-be refiners were hardly eager to risk money on distillation machines (“stills”) that might not see use. As such, the oil industry was not functioning efficiently, and much of the oil produced in the first three years went to waste. The oil that did not go to waste was expensive to bring to market, requiring wagon-driving teamsters to haul it 20–40 miles to the nearest railroad station in costly 360-pound barrels.30
But once production reached high levels, driving crude oil prices down, the transportation, refining, and distribution of oil attracted much investment and talent. An early, price-slashing solution to transportation problems was “pond fresheting.” Entrepreneurial boatmen on Oil Creek and the Alleghany River, which led to Pittsburgh, determined that they could offer cheaper transportation by strapping barrels of oils on rafts and floating them down the river. But this only worked half the year; the rest of the time, water levels were too low. The ingenious workaround they devised was to pay local dam owners to release water (“freshet”) at certain points in the year in order to raise water levels, thereby enabling them to float their rafts downstream. The method worked, and Pittsburgh quickly became the petroleum refining capital of America.31
Railroads entered the picture as well, building lines to new cities, which allowed them to become refining cities. In 1863, the Lake Shore Railroad built a line to Cleveland, inspiring many entrepreneurs to establish refineries there—including a 23-year-old named John Rockefeller.32 Another innovation in oil transport was “gathering lines”—small several-mile-long pipelines that connected drilling sites to local storage facilities or railroads. At first, gathering lines were halted by the Pennsylvania government’s lax enforcement of property rights; the politically-influential teamsters would tear down new pipelines, and the government would look the other way. But once rights were protected, gathering lines could be constructed quickly for any promising drilling site, enabling sites to pump oil directly to storage facilities or transportation centers without the loss, danger, and expense of using barrels and teamsters. Still another innovation was the tank car. These special railroad cars could carry far more oil than could normal boxcars loaded with barrels, and, once certain problems were solved (wood cars were replaced by iron cars and measures were taken to prevent explosion), they became the most efficient means of transportation.33
In the area of refining, innovation was tremendous. Certain industry leaders, such as Joshua Merrill of the Samuel Downer Company and Samuel Andrews of Clark, Rockefeller, and Andrews (later to be named Standard Oil), continuously experimented to solve difficulties associated with the refining process. To refine crude oil is to extract from it one or more of its valuable “fractions,” such as kerosene for illumination, paraffin wax for candles, and gasoline for fuel. The process employs a still to heat crude oil at multiple, increasing temperatures to boil off and separate the different fractions, each of which has a different boiling point. Distillation is simple in concept and basic execution, but to boil off and bottle kerosene was hugely problematic: Impure kerosene could be highly noxious and highly explosive. Additionally, early stills did not last very long, yielded small amounts of kerosene per unit, took hours upon hours to cool between batches, and raised numerous other challenges.
Throughout the 1860s, the leading refiners experimented with all aspects of the refining process: Should stills be shaped horizontally or vertically? How should heat be applied for evenness of temperature? How can the life of the still be maximized? How can the tar residue at the bottom be cleaned quickly and with as little damage to the still as possible? What procedures should one employ to purify the kerosene once distillation has been performed? When the process involves a chemical treatment, how much of that treatment should be used? Is it profitable to “crack” the oil, heating it at high temperature to create more kerosene molecules, which creates more kerosene per barrel but takes longer and requires expensive purification procedures?
The leading refiners progressively asked and answered these questions, and profited immensely from the knowledge they gained. By the end of the 1860s, the basics of refining technology had been laid down,34 though it would not be until the 1870s—the Rockefeller era—that they would be employed industry-wide.
On the marketing and distribution end, kerosene became a widely available good. Refining firms made arrangements with end sellers, most notably wholesale grocers and wholesale druggists, to sell their product. Rockefeller’s firm was a pioneer in international sales, setting up a New York office to sell kerosene all around the world—where it was in high demand thanks to its quality and cheapness, and to the lack of alternatives.35
The pace of growth of the oil industry was truly phenomenal. Within five years of its inception, with no modern communication or construction technology, the industry had made light accessible to even some of the poorest Americans. In 1864, a chemist wrote:
Kerosene has, in one sense, increased the length of life among the agricultural population. Those who, on account of the dearness or inefficiency of whale oil, were accustomed to go to bed soon after the sunset and spend almost half their time in sleep, now occupy a portion of the night in reading and other amusements.36
Within five years, an unknown technology and an unimagined industry had become a source of staggering wealth creation. Had the early days of this industry been somehow filmed, one would see oilmen in every aspect of the business building up an enormous industry, moving as if the film were being fast-forwarded. Almost nothing in history rivals this pace of development, and it is inconceivable today that any construction-heavy industry could progress as quickly. It now takes more than five years just to get a permit to start building an oil derrick, let alone to complete the derrick, much less thousands of them.
But in the mid-1800s, no drilling permits or other government permissions were required to engage in productive activity. This did not mean that oilmen could pollute at will—property rights laws prohibited polluting others’ property (though some governments, unfortunately, were lax in their enforcement of such laws). It did mean that, for the most part, they were treated as innocent until proven guilty; and they knew that so long as they followed clearly defined laws, their projects would be safe.37
Anyone with an idea could implement it as quickly as his abilities permitted. If he thought a forest contained a valuable mineral, he could buy it. If he thought drilling was the best means of extracting the mineral, he could set up a drilling operation. If he thought a railroad or a pipeline was economical, he could acquire the relevant rights-of-way, clear the land, and build one. If he thought he could do something better than others, he could try—and let the market be the judge. And he could do all of these things by right, without delay—in effect, developing energy at the speed of thought.
As one prominent journalist wrote:
It is certain . . . the development [of the petroleum industry] could never have gone on at anything like the speed that it did except under the American system of free opportunity. Men did not wait to ask if they might go into the Oil Region: they went. They did not ask how to put down a well: they quickly took the processes which other men had developed for other purposes and adapted them to their purpose. . . . Taken as a whole, a truer exhibit of what must be expected of men working without other regulation than that they voluntarily give themselves is not to be found in our industrial history.38
Imagine if George Bissell and Edwin Drake were to pursue the idea of drilling for oil in today’s political context. At minimum, they would have to go through a multiyear approval process in which they would be required to do environmental impact studies documenting the expected impact on every form of local plant and animal life. Then, of course, they would have to contend with zoning laws, massive taxes, and government subsidies handed to their competitors. More likely, the EPA would simply ax the project, declaring Titusville “protected” government land (the fate of one-third of the land in the United States today). More likely still, Bissell would not even seriously consider such a venture, knowing that the government apparatus would wreck it with unbearable costs and delays, or a bureaucratic veto.
The speed of progress depends on two things: the speed at which men can conceive of profitable means of creating new value—and the speed at which they can implement their ideas. Since future discoveries depend on the knowledge and skills gained from past discoveries, delays in market activity retard both the application and the discovery of new knowledge.
In 1865, members of the oil industry experienced a tiny fraction of the government interference with which the modern industry regularly contends: the Civil War’s Revenue Act of 1865. This was a $1 per barrel tax on crude inventory—approximately 13 percent of the price. This Act “slowed drilling to a virtual standstill” and “put hundreds of marginal producers out of business” by eating into businesses’ investment and working capital.39 Remarkably, the damage done by the Act scared the government away from taxing crude and oil products for decades, an effective apologyforits previous violation of property rights. Such was the general economic climate of the time.
After the brief but crushing bout of confiscatory taxation, the economic freedom that made possible the rise of the oil industry resumed, as did the industry’s explosive growth. In 1865, kerosene cost 58 cents a gallon, much less expensive than any prior product had been—and half the price of coal oil.40 But entrepreneurs did not have time to revel in the successes of the past. They were too busy planning superior ventures for the future—knowing that with creativity they could always come up with something better, and that customers would always reward better, cheaper products.
The paragon of this relentless drive to improve was Rockefeller, who developed a new business structure that would bring the efficiency of oil refining—and ultimately, the whole process of producing and selling oil—to new heights. Rockefeller was obsessed with efficiency and with careful accounting of profit and loss. In seeking to maximize his efficiency, he had one central realization that steered the fate of his company: Tremendous efficiency could be achieved through scale. From his first investment in a refinery in 1863, when he built the largest refinery in Cleveland, to his continual borrowing to expand the size of his operations, Rockefeller realized that the more oil he refined, the more he could invest in expensive but efficient devices and practices whose often-high costs could be spread over a large number of units. He created barrel-making facilities that cut his barrel costs from $3 to $1 each. He built large-scale refineries that required less labor per barrel. He purchased a fleet of tank cars, and created an arrangement with a railroad that lowered his costs from $900,000 to $300,000 a trip. (Such savings are the real basis of Rockefeller’s much-maligned rebates from railroads.)
Rockefeller’s improvements, which can be enumerated almost indefinitely, helped lower the prevailing per-gallon price of kerosene from 58 cents in 1865, to 26 cents in 1870—a price at which most of his competitors could not afford to stay in business—to 8 cents in 1880. These incredible prices represented the continuous breakthroughs that the Rockefeller-led industry was making. Every five years marked another period of dramatic progress—whether through long-distance pipelines that eased distribution or through advances in refining that made use of vast deposits of previously unrefinable oil. Oil’s potential was so staggering that no alternative was necessary. But then someone conceived of one: the electric lightbulb.
Actually, many men had conceived of electric lightbulbs in one form or another; but Thomas Edison, beginning in the late 1870s, was the first to successfully develop one that was practical and potentially profitable. Edison’s lightbulb lasted hundreds of hours, and was conceived as part of a practical distribution network—the Edison system, the first electrical utility and distribution grid. As wonderful as kerosene was, it generated heat and soot and odor and smoke and had the potential to explode; lightbulbs did not. Thus, as soon as Edison’s lightbulb was announced, the stock prices of publicly traded oil refiners plummeted.
Oil, it appeared, was no longer the future of illumination energy; electricity was. This fact, and the competitive pressures it placed on the oil industry, prompted entrepreneurs to figure out whether their product could enjoy comparable consumer demand in any other sphere, inside or outside of the energy industry. They worked to expand the market for oil as a lubricant and as a fuel for railroads and tankers. But the fate of the industry would hinge on the rise of the automobile in the 1890s.41
It is little known that most builders of automobiles did not intend them to run on gasoline. Given the growth and popularity of electricity at the time, many cars were designed to run on electric batteries, whereas other cars ran on steam or ethanol. Gasoline’s dominance was not a fait accompli.
If the market had not been free, the electric car would likely have been subsidized into victory, given the obsession with electricity at the time. But when the technologies were tested in an open market, oil/gasoline won out—because of the incredible efficiency of the Rockefeller-led industry coupled with gasoline’s energy density. Per unit of mass and volume, it could take a car farther than an electric battery or a pile of coal or a vat of ethanol (something that remains true to this day). Indeed, Thomas Edison himself explained this to Henry Ford, in a story told by electricity entrepreneur Samuel Insull.
“He asked me no end of details,” to use Mr. Ford’s own language, “and I sketched everything for him; for I have always found that I could convey an idea quicker by sketching than by just describing it.” When the conversation ended, Mr. Edison brought his fist down on the table with a bang, and said: “Young man, that’s the thing; you have it. Keep at it. Electric cars must keep near to power stations. The storage battery is too heavy. Steam cars won’t do, either, for they require a boiler and fire. Your car is self-contained—carries its own power plant—no fire, no boiler, no smoke and no steam. You have the thing. Keep at it.”. . . And this at a time when all the electrical engineers took it as an established fact that there could be nothing new and worthwhile that did not run by electricity.42
By 1912, gasoline had become a staple of life—and was on the way to changing it even more than kerosene had. A trade journal from 1912, Gasoline—The Modern Necessity, read:
It seems almost unbelievable that there was once a time when the refiners and manufacturers of petroleum products concerned themselves seriously with finding a market for the higher distillates. At the present time it is the higher distillate known as gasoline that is giving not alone the refiners grave concern but modern civilization as well. Then it was how to find an adequate and profitable market for it; now it is how to meet the ever-increasing demand for it.43
Oil was the ultimate alternative energy—first for illumination, then for locomotion. In a mere half century, oil went from being useless black goo to the chief energy source leading the illumination and mobilization of the world. Young couples filling up their automobiles in 1910 had nary a clue as to how much thought and knowledge went into their ability to power their horseless carriages so cheaply and safely. Nor did most appreciate that all of this depended on a political system in which the government’s recognition and protection of the right to property and contract enabled businessmen to develop the world around them, risk their time and money on any innovation they chose, and profit from the results.
If we compare today’s “planned” energy market to the rights-respecting energy market that brought about the emergence of oil, we can see in concrete fact the practicality of a genuinely free market.
Instead of protecting property rights and unleashing the producers of energy to discover the best forms of energy and determine how best to deploy them (which includes genuine privatization of the electricity grid and other transcontinental development),44 our government randomly dictates what the future is to be. Today, we are told, as if it were written in the stars, that plug-in hybrids powered by solar and wind on a “smart grid” are the way to go—a claim that has no more validity than an 1860s claim that a network of wagon drivers should deliver coal oil nationwide.
What sources of energy are best pursued and how best to pursue them can be discovered only by millions of minds acting and interacting freely in the marketplace—where anyone with a better idea is free to prove it and unable to force others to fund his pursuit. When the government interferes in the marketplace, countless productive possibilities are precluded from coming into existence.
Today’s government as “energy planner” not only thwarts the market by coercively subsidizing the “right” energy technologies; it damages the market by opposing or even banningthe “wrong” energy technologies or business models. Today’s energy policy severely restricts the production of every single practical, scalable form of energy: coal, natural gas, oil, and, above all, nuclear.
Nuclear energy deserves special mention because it has tremendous proven potential, the result of its incredible energy density: more than one million times that of any fossil fuel—which, unlike oil, coal, or natural gas, has never been allowed to develop in anything resembling a free market. Thanks to environmentalist hysteria, this proven-safe source of energy has been virtually banned in the United States. And when nuclear plants have been permitted, construction costs and downtime losses have been multiplied many times over by multi-decade regulatory delays. Even in other countries, where nuclear power is much more welcome, it is under the yoke of governments and is therefore progressing at a fraction of its potential.
If the scientists, engineers, and businessmen in the nuclear power industry had been able to pursue their ideas and develop their products in a free market—as oilmen once were able to do—how much better would our lives be today? What further technologies would have blossomed from that fertile foundation? Would automobiles even be running on gasoline? Would coal be used for anything anymore? And if entrepreneurs with other, perhaps even better, energy ideas had been free to put them into practice as quickly as their talents would allow—just as their 19th-century forebears had—might we by now have realized the dream of supplanting nuclear fission with nuclear fusion, which many consider the holy grail of energy potential?
The fact is, we cannot even dream of what innovations would have developed or what torrents of energy would have been unleashed. As the history of the original alternative energy industry illustrates, no one can predict the revolutionary outcomes of a market process. Happily, however, with respect to the future, we can do better than dream: We can see for ourselves what kind of untapped energy potential exists, by learning from the 19th century. We can—and must—remove the political impediments to energy progress by limiting the government to the protection of rights. Then, we will witness something truly spectacular: energy at the speed of 21st-century thought.
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1 Robert Bryce, Gusher of Lies (New York: PublicAffairs, 2008), p. 132.
2 Ibid., pp. 267–70.
3 International Energy Outlook 2008, “Highlights,” Energy Information Administration, U.S. Department of Energy, http://www.eia.doe.gov/oiaf/ieo/pdf/highlights.pdf.
4 Annual Energy Review, “U.S. Primary Energy Consumption by Source and Sector, 2007,” Energy Information Administration, U.S. Department of Energy, http://www.eia.doe.gov/emeu/aer/pecss_diagram.html.
5 “Al Gore’s Challenge to Repower America,” speech delivered July 17, 2008, http://www.repoweramerica.org/about/challenge/.
7 Thomas L. Friedman, Hot, Flat, and Crowded: Why We Need a Green Revolution—and How It Can Renew America (New York: Farrar, Straus & Giroux, 2008), p. 172.
8 Ibid., p. 186.
9 Ibid., pp. 187–88.
10 Jimmy Carter, “NATIONAL ENERGY PLAN—Address Delivered Before a Joint Session of the Congress,” April 20, 1977, http://www.presidency.ucsb.edu/ws/index.php?pid=7372.
12 Richard Nixon, “Special Message to the Congress on Energy Policy,” April 18, 1973, http://www.presidency.ucsb.edu/ws/index.php?pid=3817&st.
13 Linda R. Cohen and Roger G. Noll, The Technology Pork Barrel (Washington, DC: The Brookings Institution), pp. 217–18.
14 Ibid., pp. 259–313.
15 In this regard, I recommend Gusher of Lies by Robert Bryce and The Technology Pork Barrel by Linda R. Cohen and Roger G. Noll.
16 Harold F. Williamson and Arnold R. Daum, The American Petroleum Industry 1859–1899: The Age of Illumination (Evanston, IL: Northwestern University, 1963), p. 29.
17 Ibid., p. 320.
18 Ibid., p. 28.
19 M. Luckiesh, Artificial Light (New York: The Century Co., 1920), pp. 51–56.
20 Williamson and Daum, The American Petroleum Industry, pp. 33–34.
21 Ibid., pp. 34–36.
22 Ibid., p. 32.
23 Ibid., pp. 32, 38–42.
24 This discussion is based on Williamson and Daum, The American Petroleum Industry, pp. 43–60.
25 Calculated using GDP Deflator and CPI, http://www.measuringworth.com/.
26 This discussion is based on Williamson and Daum, The American Petroleum Industry, pp. 63–81.
27 Ibid., pp. 86–89.
28 Ibid., p. 103.
29 Robert L. Bradley, Oil, Gas, and Government: The U.S. Experience, vol. 1 (London: Rowman & Littlefield, 1996), p. 18.
30 Williamson and Daum, The American Petroleum Industry,pp. 85, 106.
31 Ibid., pp. 165–69.
32 Burton W. Fulsom, The Myth of the Robber Barons (Herndon, VA: Young America’s Foundation, 1996), p. 85.
33 Williamson and Daum, The American Petroleum Industry, pp. 183–89.
34 Ibid., pp. 202–31.
35 Alex Epstein, “Vindicating Capitalism: The Real History of the Standard Oil Company,” The Objective Standard, Summer 2008, pp. 29–35.
36 Williamson and Daum, The American Petroleum Industry, p. 320.
37 For a comprehensive account of the existence and decline of economic freedom in the oil industry, see Bradley, Oil, Gas, and Government.
38 Paul Henry Gidden, The Birth of the Oil Industry (New York: The Macmillan Company, 1938), p. xxxix.
39 Bradley, Oil, Gas, and Government.
40 Discussion based on Alex Epstein, “Vindicating Capitalism.”
41 Discussion based on Harold F. Williamson, Ralph L. Andreano, Arnold R. Daum, and Gilbert C. Klose, The American Petroleum Industry, 1899–1959: The Age of Energy (Evanston, IL: Northwestern University Press, 1963), pp. 184–95.
42 Samuel Insull, The Memoirs of Samuel Insull (Polo, IL: Transportation Trails, 1934, 1992), pp. 142–43.
43 Williamson, Andreano, Daum, and Klose, The American Petroleum Industry, p. 195.
44 Raymond C. Niles, “Property Rights and the Electricity Grid,” The Objective Standard, Summer 2008.