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Barrels of Oil, Miles of Mud

Titusville, Pennsylvania

THE EVIDENCE WAS right there. On its first day of operation, Aug. 27, 1859, Edwin Drake's well had produced all of 25 barrels of oil from the depths of the earth, albeit the very shallow depth of 69 feet.

This was, in retrospect, a monumental achievement and a date that would change the destiny of the world. But no one understood it at the time. So Drake's well, just down the road from the sleepy village of Titusville, Pa., was, more than anything else, a local curiosity.

It took over a week for James Townsend, who lived in Connecticut and was the promoter and fund-raiser of the drilling project, to learn from his man on the spot, Edwin Drake, about the successful oil well. A nervous Townsend informed almost no one, out of fear that the Drake well was a fluke and would dry up within a short time after the initial success. All of the other holes in the ground in the Ohio Valley or western New York had done just that. Thus, it was almost a month before the news of Drake's oil well was reported in a newspaper in an adjacent county.

Despite the caution of Townsend and Drake, other local speculators began to do what speculators have always done. They approached neighboring landowners with offers to take out leases. With the legalities out of the way (well...sometimes) they commenced to put down new wells on lands near Oil Creek.

Overall, the drilling efforts started relatively slowly. Most people still had to overcome the deeply entrenched preconception that it was preposterous to obtain oil from a hole in the ground. But Drake had been successful and had proved the concept. Others attempted to imitate his effort.

"Closeology" and "Creekology"

By November of 1859, the first of what would eventually become a forest of drilling derricks began to poke through the treetops south of Titusville. The first wells were almost adjacent to the lands on which Drake had drilled. In geological parlance, this is called "closeology," the geology of being "close" to an existing producer.

Other prospectors decided that, since Drake had struck oil in a creek valley, they too would drill in creek valleys. This was called "creekology," or the science of drilling in creek beds.

Some men promoted themselves as being able to smell oil in the ground. Others used the tried-and-true method of holding a daubing stick close to the ground. Yes, it was that scientific.

To be sure, there was little in the way of what passes for modern geological knowledge in the vicinity of Oil Creek.

Sequencing and stratigraphy was limited amongst the drillers to a working knowledge of the significance of red cuttings and gray cuttings from down-hole. Structural analysis was limited to observing productive wells and digging offset pits. Reservoir management was pretty much just filling barrels with whatever came out of the ground, or building an earthen berm around a well to contain the oil that flowed out, in case of a big producer. And on occasion, there was a fire in the oil-soaked drill workings, sparked by lightning, if not by a careless lantern-keeper.

By the winter of 1860, the sounds of men and machines making depth began to echo in the valleys. Most of these early drillers and operators were local folk, or members of an industrious and close-knit fraternity who had grown up in and around the salt well or oil-skimming business.

On the best days of their lives, they were living at the margins of the economy and running thinly capitalized operations. But Mother Nature was kind to many of these hardworking souls and had placed her oil-bearing strata relatively close to the surface...close enough for what these men were attempting to accomplish.

Gushing Geysers of Clear Oil - and Hope

Many of these new wells found oil-bearing sands. The ancient oil in these Devonian-age rocks -- sweet-smelling, almost green Pennsylvania crude petroleum -- began to make its way to the surface. And in industrial quantities, no less.

The petroleum of Venango County was clear and easy to refine. It was perfect for making lubricants and illuminants. From cotton spindles to railway locomotives, American industry needed a large quantity of something with which to grease the wheels of progress.

Pennsylvania crude was the answer. Aside from its outstanding lubricant qualities, simple distillation (well...nothing is that simple) yielded kerosene, which burned with a luminosity to rival that of the increasingly scarce and expensive whale oil.

In some places, from some wells, the oil rose to the surface due to its own natural reservoir pressure. The greenish liquid just poured out of the top of the conductor pipe like ambrosia from a fountain.

Not a few of the early wells hit pressurized pockets that made for spectacular gushers, as often as not hurling oil, mud, rock and drilling equipment (and the occasional unfortunate driller) dozens of feet into the air. In most other places, oil saw the light of day via pumping equipment that lifted the substance from its former home of millions of years, from the pore spaces within the ancient sedimentary rocks, to the open atmosphere.

By the spring of 1860, many people near and far were catching catch oil fever. Their hearts nurtured the hope to mirror the success of Col. Drake. And to a man (and an occasional woman), it was safe to say that the oil prospectors wanted to strike it rich in the process. As is the case in all eras, investment followed hope.

Over the next year, into 1861, an entire investment industry began to spring up along the eastern seaboard to pool funds for the purpose of drilling oil wells. By the spring of 1861, the investment model was pretty much established. A promoter would obtain a lease, and then move to raise funds among mostly well-heeled investors to drill a well on a leased property.

It was a fairly simple business model. (In the year between spring of 1861 and spring of 1862, this business model made a young, up-and-coming executive with the Pennsylvania Railroad very rich. His name was Andrew Carnegie.) Then as now (well, maybe not now...), in an economy in which capital was scarce, investors tended to involve themselves in a business, perform their due diligence, and be careful about those in whom they placed their faith to make a well and return the investment...

The Civil War...

...And then, in April 1861, South Carolina seceded from the Union, followed by other Southern states. The Civil War began...

Before the Civil War, the federal government was little involved with the nation's money supply. The economy's currency consisted of gold and silver specie, and state and private bank notes redeemable in gold or silver on demand.

Decades of both federal and state court holdings kept both the central and state governments out of the business of issuing currency not backed by precious metal. Prudent governance required politicians to make hard choices about where and how to spend funds. Say what you will about it, but scarcity of capital meant that money tended (not always, but most of the time) to flow to its highest and best use.

Pre-Civil War, federal spending generally hovered around 3% of the national economy, with almost all federal revenues coming from tariffs and imposts. There were ups and downs, of course. The high point of federal spending was 6% of the national economy during the War of 1812, and the low was in 1843, at the start of Martin Van Buren's presidency, when the federal government spent funds equal to about 2% of the national economy.

When the Civil War started, no one on either side, North or South, knew how much it would cost. In total, after four years of fighting, the Union government increased its expenditures by a factor of 15. Under the governance of Abraham Lincoln, the United States spent well over $15 billion (equivalent to over $300 billion today) to fight the war.

This was an immense sum that the federal government could not even begin to raise through tariffs and imposts. So to generate the funds necessary to conduct the war, the federal government almost immediately commenced to borrow $3 billion by selling bonds. Also during the course of the war, the federal government printed almost $1 billion in paper currency, or "greenbacks," that was unbacked by gold or silver.

This newly inked federal paper flooded into the national economy as the government purchased all of the goods and implements required to wage war, not to mention pay the troops to do the fighting. As the new federal paper moved through the economy, much of it found its way into the embryonic oil business.

Back in those days, all that one needed to do to set up a business corporation in Pennsylvania was to register a name at a county courthouse. During the years of the Civil War, well over 30,000 so-called "corporations" were registered in Pittsburgh and Philadelphia, not to mention thousands of entities created in New York, for the stated purpose of prospecting for oil near Titusville.

Conveniences to Facilitate Larceny

The vast majority of these entities never drilled even 1 inch into the earth. They were instead, and not to put too fine a point on it, mere conveniences to facilitate larceny. There are stories told of promoters walking out of the courthouse, waving a fancy-looking document bearing the stamp of the Clerk of Courts, and having people line up to hand over cash and purchase shares in a particular leasehold. The raw speculation, outright lying, and rank fraud that occurred is a story in and of itself.

Federal greenbacks had encountered Drake's well. This combination spawned a form of behavioral psychology that grips the masses of investors once a mania has set in. People saw that there was money to be made in oil wells, and many of them decided to buy into the business, for the most part sight unseen.

The goal of most people was, as is almost always the case, to buy at whatever price was quoted, in the hope of selling even higher. The buying frenzy turned to boom, as shares of stock and the underlying leases flipped and flipped, and flipped again. Drilling wells was almost secondary to the process for many participants, and could even lead to..."problems" if the well was dry. As with all booms, the speculative process eventually begat a selling panic, which is the natural and inevitable consequence of an investment mania. But this gets ahead of the story.

Still, with investment being channeled into the field, oil started flowing from the ground. The petroleum was flowing from below, and in unprecedented quantities. Yes, there was a market for the refined illuminant. But the problem rapidly became what to do with the substance once it arrived at the surface of the earth, and how to transport it to the refineries. There were simply not enough containers in which to store the oil that was bubbling up from the ground.

Wash Tubs and Rain Barrels - Anything to Hold Oil

Producers began to ransack barns and cellars and trash heaps throughout western Pennsylvania, up into New York, and over into Ohio. They were looking for anything into which they could pour the oil. The list included old barrels that had formerly held flour, whiskey, turpentine, pickles, hog fat, vinegar, and molasses. Old kegs, whether they had held nails or beer, found new lives. Even wash tubs and rain barrels disappeared from households as these items were begged, borrowed, sold, or stolen into the oil patch.

These impromptu oil containers were inappropriate and woefully inadequate in both number and quality, but they were the best that people could find in an agrarian landscape. It was a cruel trick that Mother Nature was playing -- yielding her oil to the drillers, and then taking it back as it leaked out onto the ground from unsuitable containers.

Many days and many places, there were simply no barrels to be had and the oil that pushed its way up the conducting pipes was allowed to flow into ponds made by piling earthen berms up in a circle. When there was nowhere else to store the oil, it simply followed the law of gravity and made its way into the streams and creeks, thence to the Allegheny River and beyond.

In retrospect, this process made for an environmental disaster. But it was not as if anyone had planned this particular oil-daubed future for humanity. At first, certainly in that part of the world, things simply evolved, and usually day by day and need by need. At the time, people just came up with whatever ideas crossed their minds and handled the problem as best they could. No one really knew any better. These were, after all, the birth pangs of the modern age.

Other industries arose almost instantly to meet the needs of this new business of producing oil. Sawmills and carpenters cut lumber, blacksmiths and forges hammered iron into bands, coopers built barrels by the tens of thousands. Railroaders and river-shippers eyed what was going on and sharpened their pencils, because they thought they knew what was going to happen. And then there were the teamsters.

John Smith Drives His Horses and Oil Back to Earth

Whether the petroleum was ultimately to move by railway or river dock, someone had to haul these barrels of oil from the wells to a shipping point. And soon the countryside was jammed with literally thousands of burly fellows, with their wagons and horse teams, loading and hauling these kegs and barrels of oil. For a price, of course. And the more remote the well, the prettier the price to be charged.

At first, the wagoneers were local farm boys, but soon the demand for labor and the money to be made attracted workers from neighboring counties, and then from other states.

As the Civil War unfolded after the events of April 1861, and particularly after the U.S. government began to call for men to join or muster into the Union Army, a remarkable number of drivers named John Smith, or something comparably bland, began to appear on the scene. These were city fellows escaping the draft, or bounty jumpers who had taken an enlistment bonus and then left an army camp in the dead of night.

If a man sought anonymity and wanted to avoid the prying eyes of the outside world, driving a wagon rig loaded with oil barrels in Venango County was the place to be. Come one, come all, because there was work in the oil fields for strong men who could control a team of horses and move a wagon with a 3,000-pound load of leaking oil barrels.

The farm trails and dirt paths in and around Titusville and Oil Creek soon became all but impassable. The wheels of the heavily laden wagons ground deep ruts into the soil. Where the roads were covered with wooden planks, the weight of the wagons rapidly smashed even 10-inch-thick lumber into splinters.

The ruts almost immediately filled with water and turned the rights of way into seas of mud. The oil, leaking or spilling from the precious barrels and pouring out from the wagons, turned the mud into a gooey brown muck that caked the wagon wheels and slowed movement even more.

Dray animals were quickly injured or exhausted in this environment. Reliable records state that literally tens of thousands of horses perished of overwork, injury, and disease in the first few years of this embryonic effort to move industrial quantities of petroleum away from the wellhead. (By way of comparison, more horses were killed in the oil fields than on the battlefields of the Civil War.) Contemporary accounts write of dead horses lining the roads, collapsed in harness, abandoned and pushed to the side by their drivers.

From the outset, oil well operators were looking for ways to move their product at lower cost and with less loss in transit than by using leaky barrels and hauling their barrels in wagons over bad trails. The idea of using a pipeline was not new, wooden lines having been used to move water and even natural gas in some parts of the United States since Colonial times.

Operators commenced to build pipelines in early 1862, but it took several years of experimentation and trial-and-error development before iron pipelines and associated pumping rigs came into common use in the oil fields. Part of the delay was due to vandalism and sabotage of oil pipelines by numerous teamsters, who objected to losing their difficult but good-paying jobs to technological innovation. (Note: These teamsters of old are not to be confused with members of the modern Teamsters Union, who everyone knows do not as a rule engage in acts of vandalism.)

"Malinvestment"

Classical Austrian economics teaches about the concept of "malinvestment." In short, this is so-called investment that never should have occurred, funded with credit creation that exceeds the natural patterns of growth in an economy. Malinvestment often serves to diminish the wealth of a society, because it represents capital that is allocated in a way that reduces the overall productivity of an economy.

This is as good an explanation as any for what was going on in the Pennsylvania oil patch during the Civil War. Too many fiat dollars led to too many investment boondoggles, too many oil leases, too many oil wells, and too much production. Drillers produced oil at rates far beyond the ability of the economy to absorb. Oil prices fluctuated from an early $50 per barrel to about 10 cents within one six-month period. And the derrick-floor solution to low prices was, sad to say, more production.

Eventually, this wildcat nature of oil production and pricing led a savvy entrepreneur named John D. Rockefeller to come up with a solution. We will discuss this in another article in Whiskey & Gunpowder.

Until then, best wishes to all...

Byron W. King

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