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The Pioneer

Drake's well in Titusville made news in 1859, but in the years that followed, only a few Americans had any notion of where its success might lead. One of those few was John D. Rockefeller, who in 1863 built an oil refinery in Cleveland with his partners.

Seven years later, at the age of 31, Rockefeller incorporated Standard Oil of Ohio and began building it into an integrated oil producing, transporting, refining, and marketing company. It came to dominate the oil products market. It developed the business trust as a structure for mergers and acquisitions. It streamlined production and logistics, lowered costs, undercut competitors, and became one of the earliest and largest multinational corporations. At its peak, Standard Oil controlled 90 percent of the U.S. oil industry.

In 1911, the Supreme Court sustained a ruling that Standard Oil was an illegal monopoly and ordered it broken up into 33 separate companies. At the time of the dissolution, Rockefeller was the richest man in the world. And he has remained the richest single human ever to walk the earth, with a net worth of $340 billion in today's dollars.

(That's if you don't count King Mansa Musa I, who ruled the Mali Empire from 1312 to 1337 and controlled half of the world's gold and salt production. His fortune is pegged at the modern equivalent of $400 billion, although when you go back that far, the reliability of estimates declines and the ambiguity of inflation adjustments increases. No numbers are found for Genghis Khan, who might have topped them all.)

Go Big

In the quarter-century following Rockefeller's first refinery in 1863, the oil industry had grown into big business, but it hadn't yet grown into a giant, world-shaping business. It couldn't do so when a major well might yield only 50 barrels a day. Then everything changed.

In the early 1890s, a group of businessmen and amateur geologists became convinced that a giant pool of oil lay under a salt dome south of Beaumont, Texas. By 1899, several attempts to tap the pool had failed, so the early investors leased part of the land, a tract at Spindletop Hill, to mining engineer Andy Lucas, an immigrant from the Dalmatian coast of Croatia.1 Lucas had financial support from Andrew and Richard Mellon, whose father had founded one of the nation's biggest banks in Pittsburgh.

Lucas represented a remarkable confluence of persistence, timing, and luck. He continued drilling, and on January 10, 1901, his derrick at Spindletop punctured the rock dome that had been holding down a sea of pressurized oil. A geyser of crude erupted toward the sky, the first oil gusher.

It must have been quite a sight. In Lucas's own words, set down a year later:

After many difficulties, a layer of rock containing marine shells was reached, at the depth of 1,160 feet. ... At this time there was about 600 ft. of 4-in. pipe, weighing at least 6 tons, in the well. ... When the rock was penetrated the well "blew out," lifting the whole of the 4-m. pipe.... The pipe was shot into the air ... to a height of 300 feet above the derrick, the upper works and heavy tackle of which it earned away.... The remaining 4-m. pipe, freed from the weight of the upper portion, followed with greater rapidity, and was shot through the top of the derrick. Simultaneously, the water which filled the well (being used to keep the pipe-lining clear by removing the debris of drilling) was expelled to a great height; and a column of gas, rock-fragments and his mother, he was still Antun Lucie oil followed it, at first at the rate of about 250 barrels per hour, rapidly increased to 500, 1,000 barrels, etc., until on the third day the discharge (by that time carrying no solid matter and a diminished quantity of gas) was estimated by officials and engineers of the Standard Oil Co., who were naturally the most experienced judges, to be at least 3,000 42-gallon barrels of oil per hour, or about 75,000 barrels in 24 hours.[1]

After that, capping the well became the overriding problem. No one had any experience with such a monster, and the crew had to improvise on the fly. It took nine days to bring the well under control.

Spindletop signaled the advent of Texas's, and America's, mammoth oil industry. Beaumont became a "black gold" boomtown, its population tripling in three months. The town filled with oil workers, investors, merchants, and con men (earning it the nickname "Swindle-top"). Within a year, more than 285 wells were producing at Spindletop, and some 500 oil and land companies were operating in the area, including forebears of today's Exxon, Texaco, and Mobil.

The new, super-size oil industry came to be dominated by a handful of companies eventually dubbed the Seven Sisters. These were the big go-to players for anything to do with oil and gas: exploration, development, production, refining, or marketing.

Unsurprisingly, three of the sisters were spin-offs from Rockefeller's original Standard Oil:

• Standard Oil of California (today's Chevron)

• Standard Oil of New Jersey (predecessor of Esso)

• Standard Oil of New York (predecessor of Mobil, which merged with Esso to become Exxon Mobil Corporation)

The other four were:

• Anglo-Persian Oil Company (predecessor of British Petroleum [BP], following a merger with Amoco)

• Gulf Oil (most assets later merged into Chevron)

• Royal Dutch Shell (which remains intact)

• Texaco (now merged with Chevron)

The Seven Sisters and their descendants were and are purely public companies. At one time, they controlled virtually all of the world's oil industry. But after World War II, governments that resented foreigners owning their resources began nationalizing domestic oil production.

The result today is a set of state-controlled oil companies, some of which are owned wholly by a government and some of which are owned partly by the public. Prominent among them are:

• Saudi Aramco in Saudi Arabia (the world's largest producer of crude oil and holder of the largest reserves)

• Iraq National Oil Company

• National Iranian Oil Company

• China National Petroleum Company

• Petróleos de Venezuela

• Petrobras in Brazil

• Rosneft in Russia (the biggest quasi-public producer)

The publicly owned international companies, powerful though they be, are small potatoes compared with these new giants. Today the six biggest private super-majors are responsible for just 13 percent of world oil production and hold a mere 3 percent of the world's oil and gas reserves. The comparable numbers for the seven listed state-controlled companies are 30 percent of production and 44 percent of reserves.

The shift to state ownership reduced American presence in the sector and diminished American influence on pricing.

  • [1] Anthony F Lucas, "The Great Oil Well near Beaumont Texas," American Institute of Mining Engineers Transactions, XXXI (1902), 362-374
 
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