[Byron begins his saga with background on the Civil War which was occurring at the same time. See his original article for the full text -BA.]
Victory of Another Kind
But the news from the lands up in the northern forests of Pennsylvania was different. What was happening up there was not defeat in any sense, but instead, a victory of another kind, or, as it would later be called, a “conquest of the rock.”
And what was occurring on and under the ground in Pennsylvania was not some transient, short-term event like a meeting of armies in battle. Again and again, there were accounts of men and machines kicking down holes in the hard bedrock of Pennsylvania and hitting it big in sandy formations that turned out to be oil-bearing zones. People were lifting pure Pennsylvania rock oil out of those holes in the ground.
And people were making real money up there, in and around an otherwise unknown town named Titusville. Civil War or not, the smart money began to understand that this was no small flash in the pan. In an honored fashion that goes back to the beginnings of capital accumulation, it was time for the smart money to learn more and make its play.
A Young, Up-and-Coming Man
Thus in the late fall of 1861, a young, up-and-coming executive with the Pennsylvania Railroad, a 26-year-old man named Andrew Carnegie (1835-1919) and a business partner named William Coleman boarded a steamboat in Pittsburgh. The two sojourners proceeded up the Allegheny River to the mouth of the aptly named Oil Creek. There, at the confluence of the two bodies of flowing water, a boomtown named, appropriately enough, Oil City had sprung up.
At Oil City, Carnegie and Coleman debarked from the steamboat. Next, they endured a rough and bone-jarring trip, by wagon, up what passed for roads along the banks of Oil Creek. On numerous occasions, the two passengers had to get out and push the rig through swales of thick, clinging mud, a common hazard in those good old days. And in many places, these two men of relative wealth, rising pillars of business in Pittsburgh and later in America, simply had to leave the wagon and wade their way upstream, hip deep, around the myriad obstacles in their path. The mud and ooze of Oil Creek hung on the boots of the rich, just as easily as it weighted down the feet of the poor.
“Oil Covered Everything”
In his journal, Carnegie later noted that the area was crowded with shacks and equipment, derricks and wooden tanks, barrel-making shops, and many rough-looking men driving teams of overworked horses. Oil Creek itself, according to Carnegie, was lined with boats of every shape and size that could float with an inch or two of water beneath the keel, and not a few wrecks and derelicts. Carnegie noted, with a hint of admiration, that “oil covered everything.” Amidst the frenzy, Carnegie sensed a prevailing optimism. In his autobiography, Carnegie later wrote:
“What surprised me was the good humor which prevailed everywhere. It was a vast picnic, full of amusing incidents. Everybody was in high glee; fortunes were supposedly within reach. Everything was booming. On the tops of the derricks floated flags on which strange mottoes were displayed. I remember looking down toward the river and seeing two men working their treadles boring for oil upon the banks of the stream, and inscribed upon their flag was ‘Hell or China.’ They were going down, no matter how far.”
Even as far downstream as Pittsburgh, Carnegie had seen patches of oil floating by on the waters of the Allegheny River, the remnants of upstream spills. Pittsburgh City officials and residents complained that the oil slicks fouled their water supplies, a literal foretaste of the future century of industrial pollution that would become a sad hallmark of Western Pennsylvania. But now, in his journey to the northern woods, the young railroad man was seeing the sources whence that oil came.
Aside from an occasional and foul-tasting slick on the water, the end-user in Pittsburgh and beyond saw only the refined product of this rock oil, the useful lubricant or bright-burning illuminant. Few people, in those days when transport was difficult and arduous, ever saw ground zero of production. (I dare say, few people see it today, either. Ours is a clinical and far too compartmentalized culture.) But here, spread before Carnegie, was the source, the ancient rock, the holes in the ground. This was the font whence flowed this remarkable petroleum.
And then as now, oh, what a sight was the upstream source and industrial effort that lifted oil from the depths of the Earth. Carnegie saw the drilling derricks, and there were hundreds of them to see. They were lined up deck to deck, like tall-rigged ships moored side by side in a crowded harbor. I quoted Carnegie himself, writing of how impressed and moved he was to see a pennant flying from the mast of one well, with the words “Hell or China” embroidered on it.
The words on the flag were, perhaps, the personal sentiment of only one hopeful oilman. But that flag and its message could just as easily have spoken eloquently for every other driller in the oil patch. Less than two years after Col. Edwin Drake had put down one of the world’s first commercial oil wells near Titusville in August 1859, the drillers that followed Drake had learned that they did not need to vow the impossible. There was no need for a promise to make a hole deep enough to pierce the home of the devil, let alone to transit the Earth to its far antipodal side.
No, this first generation of true oilmen did not have to make depth to some hopeless measurement. The local experience was that a properly dug well sited on the muddy creek bottoms would make its way through all of the oil sands by the time it reached a depth of about 500 feet or so. Still, 500 feet meant different things to different people. On the battlefields of the Civil War, 500 feet was what was called “close range.” In the oil patch, however, a man could be just one-tenth of a mile from untold riches, but it was a damn tough journey to get there through the solid rock of Devonian age.
Attention to Detail, Witness to an Oil Boom
Carnegie paid attention to the details. He observed the men working on the decks of the derricks and rigs, working the mechanical connections of the wells. Carnegie, who possessed a vast knowledge of railroad equipment, looked at the equipment of the oil fields and saw how this machinery worked the pumps embedded in the boreholes in the ground. Carnegie took note of how the production crews ensured that the oil from the earth filled the waiting barrels, and he also noted how the oil would seep out and escape its containers. Carnegie watched the sequence of events that occurred as the barrels were moved from the wellhead to the wagon and thence to the dock and the waiting barges on Oil Creek, or to a more distant railhead. On a small and personal scale, Carnegie watched the extraction process. But on a larger scale, Carnegie was witness to an oil boom, the first in the history of the world, but by no means the last.
The area around Oil Creek was crowded. In scenes that were reminiscent of the California Gold Rush just 10 years before and would be repeated time and again up to the present in other mad dashes to industrial development, Oil Creek was simply wall-to-wall people and equipment. In many areas, there was hardly any space for more men, more horses, more wagons, and more machines. Housing was scarce, such that boardinghouse owners would rent out rooms by the hour (and not for reasons that modern culture has probably conditioned you to believe). Most of the field workers lived in truly humble shacks, thrown up in the shadow of the derricks on which they labored.
Carnegie and his escorts moved through the cacophony and hubbub of the incipient oil boom, and then his party reached the site of the old William Storey Farm. There, downstream from the Drake well, things were quieter. And even better, most of the acreage was not drilled.
Storey Farm and Storied Tale of the Oil Patch
The Storey Farm covered about 500 acres, with all but about 100 acres located on the western side of Oil Creek. The first owner, a pioneer named James Storey, settled there in the early 1800s. The farm was mostly an expanse of bottomlands consisting of glacial till, but also included the exposed bedrock hillsides of the flanks of Oil Creek Valley. By the time of the oil rush that commenced in late 1859, control of the lands had passed to Mr. Storey’s son and daughter-in-law.
Late in 1859, during the rush to lease oil lands after Drake’s discovery upstream, the Storey Farm was a major target for speculators. No less a figure than George H. Bissell, one of the group of Connecticut and New York investors who had backed Edwin Drake’s famous first well, attempted to lease the Storey Farm. Bissell’s initial offer to Mr. and Mrs. Storey failed to convince the owners to grant a lease. Mrs. Storey wanted more than Bissell was offering, and in that particular household, her word was the final say.
So Bissell left the Storey Farm to ride up to Titusville and wire his colleagues, requesting authority to offer a larger bonus to the Storeys for the rights to drill on the farm. At that moment, as Bissell and horse rode away, another man, representing a group of investors from Pittsburgh, knocked on the back door of the Storey home and made his offer.
Legend has it that Mrs. Storey was pleased with the leasing bonus of almost $40,000 (equivalent to well over a million dollars today). But Mrs. Storey wanted something extra, and she would not say exactly what it was. It soon dawned on the landman representing the Pittsburgh group that this farm was in a wilderness area and that Mrs. Storey might appreciate something fancy. Thus, the broker sweetened the deal by offering to obtain for Mrs. Storey a colorful silk dress (although some historians have said that the consideration was a frilly petticoat). This sealed the deal. The Storeys signed the lease and the landman rode like hell to the county courthouse to record the transaction, lest the Storeys change their mind.
The competitor, Mr. Bissell, returned the next day with more negotiating authority, and was perplexed to learn that a simple petticoat, and not his good New York money, had won the lease for oil rights on the Storey Farm. It is not always a question of money, is it? Sometimes, good business requires a human touch, not to mention a fast horse.
The Pittsburgh group renamed the William Storey Farm Columbia Farm, and filed papers to form the Columbia Oil Co. The Columbia managers surveyed the land, laid out numbered lots in the flats for drilling purposes, and began to lease some of these to interested parties. A number of drillers began to kick down holes, but revenues from the sale of petroleum crashed in mid-1861 due to the low price of oil brought about by a few large strikes elsewhere on Oil Creek. These other strikes temporarily flooded the market for oil far beyond the abilities of the local refining industry to handle. This drove the price of a barrel of oil down to an almost worthless level of 10 cents per barrel. (Up in Cleveland, a young businessman named John D. Rockefeller took note of this, and we will discuss Rockefeller’s story in another article.)
Carnegie Made His Move
So Carnegie was looking at productive acreage and low prices for the product. Carnegie considered this to be a bargain, so he made his move. In his biography, Carnegie describes what happened:
“The most celebrated wells were upon the Storey farm. Upon these we obtained an option of purchase for $40,000. We bought them. Mr. Coleman…proposed to make a lake of oil by excavating a pool sufficient to hold 100,000 barrels…and to hold it for the not far distant day when, as we then expected, the oil supply would cease. This was promptly acted upon, but after losing many thousands of barrels waiting for the expected day (which has not yet arrived) we abandoned the reserve. Coleman predicted that when the supply stopped, oil would bring $10 a barrel and therefore we would have a million dollars worth in the lake. We did not think then of Nature’s storehouse below which still keeps on yielding many thousands of barrels per day without apparent exhaustion.
“This $40,000 investment proved for us the best of all so far. The revenues from it came at the most opportune time. [Carnegie’s Note: The wells on the Storey farm paid in one year $1 million in cash and dividends, and the farm itself eventually became worth, on a stock basis, $5 million.] The building of the new mill in Pittsburgh required not only all the capital we could gather, but the use of our credit, which I consider, looking backward, was remarkably good for young men.”
In other words, Carnegie purchased an interest in the Columbia wells on the Storey Farm. His hope and expectation was for a recovery in the price. While awaiting the recovery, he constructed a large impoundment to hold the oil that was being produced. Much oil was lost to leaks and evaporation. Carnegie did not understand the elements of petroleum engineering (few did back then), so he did not understand the nature of the reservoir that was yielding the oil. (Although it is worth noting he had an intuitive understanding of the concept of depletion, a concept that still challenges many people even today.)
Eventually, the market turned around, and Carnegie’s 10-cent oil became $10-per-barrel oil. The Columbia Oil Co. paid immense dividends to the young executive, enough to allow him to quit his job with the Pennsylvania Railroad and go into the iron and steel business.
Other points of interest in this history are that Carnegie hired the very best men he could find to work in his oil business. He paid above-scale wages for the time. He provided housing and medical care for the workers and for family members. The Columbia oil works had its own brass band and the first “lending library” of many that would bear the Carnegie name.
Foundation of a Great Fortune
Thus, Andrew Carnegie also profited handsomely from the Pennsylvania oil boom. It was, in many respects, the oil boom of Titusville that gave Carnegie his first real fortune, which he then leveraged into even greater wealth. Oil was Carnegie’s foundation, the rock upon which he built his other many edifices.
In 1865, flush with cash from his oil investments, Carnegie left the Pennsylvania Railroad and became a leading partner of the Keystone Bridge Co. By that time, he already owned significant shares in the Cyclops Iron Co., and his younger brother, Thomas Carnegie, was a partner in Kloman-Phipps & Co. By merging these two companies into the Union Iron Mills, the two Carnegie brothers were soon in control of the combined entity.
In 1870 and thereafter, the Carnegie men and their partners expanded their operations by constructing the Lucy, Isabella, and Carrie Furnaces. Carnegie soon adopted the Bessemer process for steel making. Carnegie and his partners went on to build the Edgar Thomson Works on the site of the Braddock’s battlefield, south of Pittsburgh (also the spot where the Whiskey Rebels in 1794 agreed not to carry out their plan to burn Pittsburgh to the ground). Carnegie sold out his interests to J.P Morgan in 1901, becoming one of the richest men in the world at that time, and one of the wealthiest men in all of history.
Andrew Carnegie was by no means the first oilman, nor was he the only industrialist to use the Bessemer process to make steel in America. But Carnegie focused on close cost controls and continuous technical improvements to his efforts. Carnegie’s business goal was always to be the most competitive operator in whatever industry in which he was engaged. These were skills that he had learned and utilized at the Pennsylvania Railroad, and honed while turning the Columbia Oil Co. into a gem of the Titusville oil patch. When Carnegie applied these methods to the steel industry, he became the dominant player of a world-class industry.
Another secret to the success of Carnegie was that he recognized and promoted talented managers. Among the men that Carnegie handpicked and promoted were such famous names in American industry as Capt. Bill Jones, Henry Clay Frick, and Charles Michael Schwab.
Carnegie had, of course, done well with the Pennsylvania Railroad in the years before 1861. He was a critical manger of the railroad system, and during the Civil War, he received a draft deferment from serving in the Union Army because of his necessary work for the railroad. But as the Civil War raged to the south of Pennsylvania (with one famous and exceptional battle at Gettysburg in July 1863), and even as Carnegie was performing his duties organizing and shipping freight for the Union forces, he was making his fortune in the oil business. And one fortune created another.
Until we meet again…
Byron W. King