In the 1970s it was petroleum. Back in 1905 it was timber. In other eras it was food, rubber, whale oil, charcoal, labor, and tin, to name just a few. Throughout human history, from one age to the next, there have been critical shortages of resources. And in each instance, there have been experts who predicted that we were soon to run out of the resource and that society was doomed.
Forecasts of doom and gloom have existed for as long as civilization has existed. But all these forecasts have been wrong. No civilization has collapsed because of the depletion of a resource. Again and again, so-called resource crises have been overcome. And it hasn't been because people learned to live with less. Nor has it been because governments stepped in to regulate production and consumption. Instead, freely functioning markets have eliminated the shortages. When markets have been allowed to operate, shortages have induced price increases. People have reacted to these increases by finding substitutes for the scarce resource, by adopting new technologies, and by resource conservation.
Reports in the popular press notwithstanding, the problems we face today are no different from those that societies experienced in the past. As long as markets are permitted to function freely, we can expect resource scarcities to be resolved with the same patterns of adaptation. Our faith in the ability of the market to eliminate crises is not based on metaphysics or even on the power of modern economic theory. Instead, it is based on the simple fact that the market has repeatedly worked to eliminate resource shortages in the past. A look at just one historical example—America's whale-oil crisis in the nineteenth century—shows how the market works to solve critical resource shortages.
During the past decade, we have heard much about alternative energy sources and synfuels. However, few people remember that petroleum is itself an "alternative energy source." Petroleum—or, as it was called, "rock oil"—was the alternative energy source of the 19th century.
Prior to the Civil War, America lubricated its machinery and fueled its lamps with oil from whales. Sperm oil, obtained from the sperm whale, was the best illuminant available at the time. But oil from other types of whales, because it was considerably cheaper than sperm oil, was widely used also. At the time, these oils were practically "essential" to an industrializing economy.
Nonetheless, during and after the Civil War, the whaling industry experienced a rapid decline. What led to such a dramatic decline? Why did such an important industry become so insignificant? Many writers have argued that the discovery of petroleum led to the demise of the whaling industry. For example, in The Whalers, A.B.C. Whipple asserted that:
It is a safe assumption that in 1859 very few, if any, whale-men had heard the name Edwin L. Drake. And there was no reason why they should have, for Drake was an obscure entrepreneur. But over the next decades every whale-man would come to know, and curse, Drake's name. For on August 27 of 1859, his Seneca Oil Company succeeded in extracting petroleum from the earth by drilling 69 feet down into the soil near Titusville, Pennsylvania. In so doing he put an end to Yankee whaling industry just as surely as if he had drilled a hole in the hold of every whaleship.
Unquestionably, petroleum did replace the previously necessary sperm and whale oil as the primary illuminant and lubricant during the decade after the Civil War. But many who have written about the rise of the petroleum industry tell a different story from that told by the chroniclers of the demise of whaling. For example, in the centennial issue of World Oil, we find the following:
Oil had been known since the beginning of history. The pitch used to caulk Noah's Ark undoubtedly was petroleum. Many other simple uses are recorded in the early pages of history and down through the centuries. Early American settlers found Indians skimming oil from seeps and using it for both internal and external medicine. A few enterprising American business pioneers were selling "Rock Oil" as medicine by the middle of the 19th Century. Their sources of supply were seepages or salt brine wells in which they were "unfortunate" enough to find oil.
However, no one gave any serious study to the commercial possibilities of oil until the simultaneous beginnings of the Age of Light and the Machine Age created the world's first and most serious oil shortage.
Keep in mind that the preceding quotation was published in 1959, fourteen years before our own serious oil shortage. However, the important assertion made in this article was that the rise of the petroleum industry was itself the result of a shortage of whale oil—America's first oil crisis.
Which was it? Did the rise of the petroleum industry sink the whaling industry? Or, was the advent of the oil industry the result of a shortage of whale oil? Was there a whale-oil crisis? Let's look at some historical evidence.
The first whaling in North America was done by Indians on the east and west coasts, long before Europeans arrived. The search for whales probably began with the killing of stranded whales, for which the Indians kept watch.
After Europeans settled New England, they also kept watch for and killed stranded whales. Not long after the settlement of New England, American whalers began to go to sea and hunt whales, probably because relative to the expanding population, fewer and fewer whales were becoming stranded in coastal bays.
New Englanders became familiar with the new (to them) and superior sperm whale when one of their species became stranded close to shore. As people became familiar with the superiority of sperm oil as an illuminant and as certain other types of whale were becoming scarce, whalers increasingly searched for sperm whales. A new industry was born.
The demand for whale products in England and the colonies increased rapidly during the first half of the eighteenth century. Consequently, the price of sperm oil rose substantially during the century until the beginning of the Revolutionary War. In 1731, the price of sperm oil was 7 pounds sterling per ton. In 1768, the price had risen to 17 pounds sterling per ton; at the beginning of the war, the price was over 40 pounds sterling. Since the index of consumer prices remained relatively stable in this period, the increase was large in both nominal and real terms.
As we would expect, the increase in price led to a substantial increase in the number of whaling vessels. By the start of the war, 60 ships were sailing from New Bedford alone, making that city the capital of the North American whaling industry, with Nantucket a close second.
Since whaling ships could not leave port during the Revolutionary War because of the high probability of being sunk by British ships, the New England whaling industry lay dormant from 1776 to 1784. But when the whaling fleet was rebuilt, the whalers found that the whale population had increased during the period of no hunting. By 1788, the New England fleet reached the same size as before the war. And by this time, whalers were venturing around Cape Horn into the Pacific Ocean.
The increased hunting had the obvious consequence. Whales were becoming increasingly scarce in the Atlantic. Further contributing to the problems of the whaling industry, Great Britain, in an effort to build its own whaling industry, imposed a tariff of 18 pounds sterling on each barrel of imported whale oil. So this tariff effectively eliminated British markets. France, however, had in the meantime become a good market, and the demand in the United States was increasing. As we would expect, ships became larger and larger, and whalers were now able to undertake voyages of up to three years.
At the beginning of the nineteenth century, the US whale-oil industry was hit with three blows. First, the French Revolution closed the French market. Then, in 1807, because of privateers, the Embargo Act prohibited whalers from leaving port. Finally, during the War of 1812, the British fleet practically destroyed the American whaling fleet.
But after the War of 1812, the whaling fleet began once more to increase rapidly. The number of ships (though not tonnage) peaked in 1846 when 729 American whaling ships were afloat. At the time, the price of sperm oil was 88 cents a barrel, and the price of whale oil was 33 cents a barrel, still relatively cheap. But cheap oil couldn't continue. High-volume whaling was rapidly depleting the raw material—the whales. The more whales killed, the fewer there were to reproduce. The birthrate declined dramatically. Spurred on by the declining whale population, the whaling ships sailed farther and farther from New England. Whaling became more and more efficient. But no matter how efficient the whalers were, the whales wouldn't cooperate by reproducing at a more rapid rate. Regardless of the efficiency of the whaling fleet, the whales just weren't there in the numbers they had been in the past.
By the 1840s, American whalers covered the sea. The Pacific was heavily hunted. And, of course, the heavy hunting clearly decreased the supply of whales even further. America was using up an important natural resource. And as in the case for all natural resources, when the supply of whales decreased, the price of whale oil began to increase.
By 1850, the price of sperm oil had risen to $1.20 a barrel and that of whale oil to 49 cents, increases of 36 and 48 percent, respectively, over a four-year period. (The increases in real terms were essentially the same since the price index remained practically unchanged over this period.) By 1856, the price of sperm oil had risen to $1.62, an increase of 84 percent over the ten-year period; the price of whale oil went to 80 cents, an increase of 143 percent over the same period. While the prices of sperm and other whale oil fell somewhat from 1856 until the beginning of the Civil War, the price in real terms fell only about 5 percent, since the price index declined over this period. In any case, in 1860 the price of oil was substantially above what it had been 20 years before.
As you would expect, induced by the rising price of oil, even more ships went to sea to hunt the whales. Total ship tonnage employed in whaling increased from 171,484 tons (543 ships) in 1850 to a peak of 208,299 tons in 1854. Tonnage remained above 200,000 tons as late as 1858, the year before the discovery of petroleum.
But increased hunting did not mean increased oil production for the whaling fleet. Although the price of oil remained relatively high and the whaling fleet remained large, whales grew increasingly scarce and more difficult to find. Just before the Civil War, there seemed to be no solution in sight. How could a country fight a war without lubricants? Whale and sperm oil was "essential," and we were about to run out of it.
Of course, there was a solution in sight. The solution was crude petroleum. Petroleum quickly became not only superior to whale oil as a lubricant and illuminant but also cheaper.
Petroleum had been known since the dawn of time. People knew it could be used for caulking, and its medicinal properties were widely known early in the nineteenth century. And as we will show, by the late 1850s people knew how to use petroleum as an illuminant and lubricant. The problem was, people didn't know how to get it out of the ground in any significant quantities.
In the early part of the 1800s, no one really experimented with petroleum as an illuminant or lubricant, because whale and sperm oil was so cheap. There was no need for a substitute oil when cheap whale oil was readily available. But when the machine age began, the demand for lighting increased and whales became scarcer. Consequently, the price of whale oil rose, and people began to search for a suitable substitute. Crude petroleum was seen by some persons to have possibilities as a solution to the whale-oil crisis as early as 1853.
By 1859, A.C. Ferris was actively working with petroleum as an illuminant in New York. He was able to make fuel from oil and he greatly improved the kerosene lamp. But he had trouble finding a supply. He was importing oil from as far away as Canada, California, and even the East Indies. This oil, as did all other oil, came from seepages and from wells that were dug rather than drilled. Ferris himself tried unsuccessfully to dig for oil in the brine area of western Pennsylvania.
Even earlier, in 1853, George H. Bissell, a journalist and teacher, had become interested in "rock oil" when he became convinced that this oil would make an excellent illuminant. So convinced was he that he purchased land on Oil Creek in Pennsylvania, an area known for its frequent oil seepage. Bissell and some other men joined together in the Pennsylvania Oil Company and were soon selling oil from seepages on their property at $1.50 a gallon. In 1855, the company hired a famous scientist, Benjamin Silliman, to analyze the properties of oil. Silliman reported that oil would make an excellent illuminant and would also be a good lubricant.
Bissell and some of his partners planned to drill for oil in 1857 using methods that others used to drill for water and salt brine. But since some of the stockholders in the Pennsylvania Oil Company objected strenuously to the venture, Bissell had to reorganize the company as the Seneca Oil Company. It then hired Edwin L. Drake, a retired railroad conductor who was totally unfamiliar with the technology of drilling wells, to drill a well on Bissell's property near Titusville, Pennsylvania. Fortunately, Drake hired William Smith, an experienced well driller, to carry out the actual drilling. The crew consisted of Smith's two young sons. On August 27, 1859, late on a Sunday afternoon, this group struck oil, made history, and changed the world.
Even before Bissell and Silliman began exploring the properties of oil, Samuel Kier of Tarentum, Pennsylvania, then the center of a large salt-well region, became interested in petroleum. In 1844, the salt-brine wells in the area began to produce a nuisance in the form of sludge, which had to be drained off onto the ground or into a canal. When the sludge caught fire one day, people recognized that this oil would burn. By 1846, many people were burning the oil in their lamps even though it was smoky and smelled bad. It did, however, give off a good light and the price was right—the stuff was free for the taking.
Kier, who was selling petroleum as a medicine, sent a sample to a chemist in Philadelphia, who reported that the oil would make a good illuminant and designed a still that might prove suitable for refining. Acting on these plans, Kier in 1854 built the first oil refinery in America in Pittsburgh, Pennsylvania. The refined oil was sold as a lighting oil. But the oil still stank when it was burned even though it did illuminate well. It also stank when being refined—so badly that the neighbors forced Pittsburgh's city officials to run both Kier and his refinery out of the city. Kier rebuilt the refinery outside the city and sold a considerable amount of lamp oil. He actually refined much of the oil from Drake's first well after 1859. Although he never could eliminate the bad odor, he did improve it.
It was left to Silliman to develop the refining process further.
By 1859, there were 53 other refineries operating in the United States, but these refineries were designed to produce coal oil. The refining process, developed by Dr. James Young in Scotland, produced illuminants and lubricants from shale, peat, and coal. While some of these coal-oil refineries went out of business after the Pennsylvania oil field came in, many were transformed into petroleum refineries.
After Drake's well came in, many others began drilling in the area. Thousands of people were attracted to the region almost immediately. Very quickly, well after well came in. Less than one year after Drake's well hit in 1858, oil was selling for $10 a barrel. By 1861 it was down to 10 cents a barrel. By late 1860, there were 15 refineries in the area; three years later there were 61. The world's first oil glut occurred. The price was so low that people all over the country were introduced to oil as a cheap, efficient, and reliable illuminant and lubricant.
The demands of a rapidly expanding manufacturing industry increased the demand for oil. Production leaped from a rate of 1,200 barrels a day in 1860 to more than 5,000 a day in 1861. On November 14, 1861, landowners in the Pennsylvania oil field met to organize and take measures to raise the price of oil. All business was to pass through a central authority. At the next meeting, the Oil Creek Association was formed to regulate production; and in January 1862 the organization set the price of oil at $4 a barrel, up $3.90 from 1861. The first OPEC had emerged. At first, they sold little oil. But by the end of 1862, because of the increased demand, the market price actually became $4 a barrel. The price steadily increased thereafter. It remained high, though, not because of the loosely formed cartel, which soon broke up, but because demand kept increasing as people became more familiar with the properties of oil. By the end of the Civil War, petroleum was the sixth most important export of the United States, ranking behind only gold, corn, tobacco, wheat, and flour.
What was happening in the whaling industry as the petroleum industry was expanding? During the Civil War, the American whaling fleet was virtually destroyed. There was a brief revival in whaling after the war when the price of whale oil went to $2.50 a gallon. The number of whaling ships recovered to 253, but the number of whales was simply too small; whales were just too hard to find. Whaling as a major industry was dead by the 1870s. It died, just as the production of "whale-sized" automobiles died as a major industry a hundred years later, because of a resource crisis. But if whaling had peaked in tonnage and number of ships years before the first oil well came in, could the decline of whaling as a major industry be blamed on the discovery of petroleum?
Returning to the question we posed earlier, what can we conclude about the beginning of the age of petroleum? Did the discovery of petroleum destroy whaling or did petroleum arise as a result of an oil (whale-oil) crisis? Certainly, we can agree that the increased scarcity of whales drove up the price of the primary illuminant and lubricant in the United States and Europe, causing, one might say, the world's first oil crisis. However, we must also agree that, after the discovery that previously known drilling techniques would work for oil and after the development of refining, whaling as a major industry was doomed.
But what can we conclude about the hypothesis that the increased scarcity of whales was an important, possibly the most important, cause of the rise of petroleum as a major industry? We know that man had known about oil for centuries. People knew that oil burned and gave light many years before 1859. We also know that men were working on lamps to burn oil prior to that year. It was a relatively simple step to adapt existing lamps to facilitate the burning of refined petroleum, once the problem of odor was solved. Also, the methods used in coal-oil refineries were easily adaptable to petroleum refining. The technology was already available in 1859, as evidenced by the rapid building of refineries in the Titusville area almost immediately after oil was struck.
Finally, the drilling techniques were well known. The drilling methods used for brine water were easily adaptable to petroleum. Drake demonstrated that oil could be extracted from the ground at a substantial rate, just as Kier had earlier demonstrated that it could be refined in large quantities. But we must wonder: what if sperm whales had multiplied so prodigiously that whale oil remained at around 25 to 30 cents a gallon? Would people have been experimenting with petroleum refineries? With petroleum lamps? With methods to extract petroleum from the ground?
It's somewhat doubtful. And it would have been inefficient and wasteful to have done so. If whale oil had been 30 cents per gallon, few resources would have been expended to obtain petroleum. Whatever their contribution to mankind, the pioneers of the oil industry—Bissell, Kier, Ferris, Drake, Silliman, and their associates—were primarily, if not solely, interested in profits. Everything we read about the early days of the Pennsylvania (later the Seneca) Oil Company leads us to believe that the stockholders were mainly interested in turning a buck or two. They were continually arguing over money. There is strong reason to believe that if Drake had not struck oil when he did, or soon thereafter, the project would have been discontinued. Some of the stockholders did not even want to send him the last expense installment of $500. When the well hit, the company was really financially strapped. These men were profit seekers, not saints.
This is not to say that if the men of Seneca had abandoned the project others would not have struck oil soon. They would have. As evidenced by the onslaught of successful wells in the Titusville area after Drake struck oil, the technique was too simple to be delayed for very long. Certainly if Kier had not developed the first refinery, someone else would have. But the pioneers, as well as those who would have succeeded them had they quit or failed, were, or would have been, motivated by potential profits.
But would there have been these potential profits from innovation had whales remained plentiful and the price of whale oil low? Or what would potential profits from petroleum have been had whales become more plentiful and whale oil fallen in price? It doesn't appear likely that there would have been as great an incentive to drill for oil and experiment with refineries.
Certainly the petroleum pioneers were well aware of what was happening to the price of whale oil. From Pennsylvania Petroleum, we quote William H. Abbott, who built the first refinery in the Titusville area. In 1888 he wrote:
The first person to experiment with petroleum, and make a success at refining it, was Samuel M. Kier, of Pittsburgh. He procured his supply from the…wells at Tarentum. When refined he called it carbon oil. I purchased it from him, paying $1.25 a gallon by the barrel. This was far superior to the oil made at the time in Canfield, Ohio, from the fine channel coal; or to whale oil which cost from $1.75 to $2.25 a gallon. It was a fortunate circumstance that on the decline of the whale-fisheries, and particularly, after the destruction of our whaling fleet by the rebels, during the last year of the war, there should be at hand so cheap and abundant a substitute; thereby preventing the public generally from suffering any inconvenience from the loss of whale oil.
Clearly, the introduction of petroleum was not simply a fortunate circumstance. The whale-oil crisis and the potentially greater crisis were certainly ended by the emergence of petroleum. Certainly there is evidence that the pioneers of petroleum were strongly motivated by profits, and the high prices of whale oil pointed to potentially high profits in petroleum. No one sent them to the oil fields of Pennsylvania to benefit humanity or to alleviate suffering. They went to benefit themselves and in doing so benefited mankind.
On that note, we find it interesting to see what Ida M. Tarbell wrote in the introduction to The Birth of the Oil Industry in 1938:
It is certain, however, the development 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. Each man made his contribution.
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.
Charles Maurice and Charles Smithson are members of the economics faculty of Texas A&M University. They have published extensively in the area of resource economics, micro-economic theory, and regulation. This article is excerpted from their book The Doomsday Myth: 10,000 Years of Economic Crises, just published by Hoover Institution Press (Stanford, Calif., 162 pp., $16.95). Copyright © 1984 by the Board of Trustees, Stanford University.
This article originally appeared in print under the headline "Why Aren't You Worried about a Shortage of Whale Oil?".