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OIL AND TROUBLE

“The frenzy has penetrated every mind and the blood has coursed like fire through the hearts of everyone who owned a bit of [Beaumont] land,” reported the Dallas Morning News on January 17, 1901. “The mind has been stunned with the possibilities of great wealth and men have been carried further from sound business principles than they care to admit.”

Plenty of men struck gold at Spindletop, but many more lost their shirts. Pattillo Higgins, for one, never saw a dime of profit off the well he had discovered and in which he had invested his fortune and sweat. Even Anthony Lucas abandoned his efforts at Spindletop within two years of tapping the gusher; the investors who had funded his efforts had offered him a mere 12 percent ownership of the oil produced, and quickly bought him out.

Like all oil boomtowns, Beaumont fell victim to land speculation, overproduction, and general disrepair. “Now every bubble of gas, every oil-coated pool in all the region is prized as a possible indication of vast oil deposits beneath,” reported the Galveston Daily News on February 3, 1901. “Consequently there is anxiety to tie up the land with leases. Prospectors are scanning the maps and running about the country in search of owners.” One farmer sold his land for $20,000 to a buyer who within minutes had turned it around to another investor for $50,000. At the height of the frenzy, the price of a single acre within Beaumont was as much as $900,000 ($22 million in today’s dollars). The disenchanted began calling the area “Swindletop.”

Boomtowns such as Beaumont had all the chaos of a carnival, teeming with prostitution, heavy drinking, theft, and public brawls. Drilling was governed by the Rule of Capture, a British law “by which oil was regarded in legal terms like a wild animal—who ever caught it first could keep it,” wrote historian Anthony Sampson. The producer or driller was entitled to as much oil as he could extract, and had no obligation to pay community taxes or government royalties.

Growth was haphazard, poorly planned. Trees were clear-cut from hillsides to provide wood for derricks and shack housing, the soil beneath them eroding in avalanches of mud during heavy rains. Relentless mule, wagon, and foot traffic turned dirt roads into impassable swamps. The mire had to be covered with wood planks so that roustabouts wouldn’t drown. Here’s one author’s description of a boomtown known as Oil City that captures the squalor surrounding the wildcatter’s existence:

Oil City, with its one long crooked and bottomless street. Oil City, with its dirty houses, greasy plank sidewalks, and fathomless mud. Oil City, where horsemen ford [sic] the street in four to five feet of liquid filth, and inhabitants wear knee-boots as part of indoor equipment. Where weary travelers consider themselves blessed if they can secure their claim to six feet of floor for the night…

Air reeks with oil. The mud is oil, the rocks hugged by the narrow street perspire oil. The water shines with rainbow hues of oil. Oil boats, loaded with oil, throng the oily stream, and oil men with oily hands fasten oily ropes around the oily snubbing posts. Oily derricks stand among the houses…and the citizens are busy boring in their back yards, in waste lots, or wherever a derrick can be erected.

Beyond the grime and disorder of these conditions, the problem with such a reckless approach to drilling was that it inefficiently depleted underground reserves. The Spindletop field produced 3.5 million barrels of oil in 1901; the following year production soared to 17.5 million barrels; in 1903 it dipped to 8.6 million barrels. By February 1904, production was down to just 10,000 barrels a day, and the supply dried up over the next four years. “The cow was milked too hard,” Spindletop founder Anthony Lucas commented during a 1904 Beaumont visit, “and moreover she was not milked intelligently.”

After his big discovery, Lucas had patented a long list of devices he’d developed at Spindletop, many of which are used to this day—including a wellhead to contain high-pressure reserves, and specific valve designs and blowout-prevention methods. He went on to serve as a successful consulting engineer throughout Europe, Russia, and Mexico. He focused his later career on devising controlled drilling methods, looking disapprovingly at production binges and the hasty, inefficient exploitation of oil resources.

Nowhere are boom-and-bust economic cycles more dramatic than in the oil industry, with its rapid swings between wild abundance and scarcity. The story of Spindletop bears this out in full color: first the massive field was discovered, then oil fever set in and brought with it overzealous drilling, then the tremendous supply this yielded far outpaced demand, in turn creating a glut in the market that caused oil prices to plummet. When Spindletop was first discovered in 1901, Lucas sold his crude for $1 a barrel, but by the time the field was producing at its peak volume, overproduction had sunk the price to 3¢ a barrel—cheaper than the drinking water that was carted out to the field’s workers. When the oil bed began to dry up a year later and demand caught up to supply, prices then predictably began to soar.

Spindletop had one significant distinction from the majority of active fields of its era that worked both in its economic favor and against it: its oil was a lightweight sulfurous variety of petroleum that was not well suited for using as a lubricant or burning in lamps—the two biggest markets for oil at that time. Spindletop’s crude was, however, compatible as a fuel for tanker ships, locomotives, and generators—machines that were mostly coal-fired at the time. It also worked to fuel the automobile—a new European invention that had debuted in the American market just a few years before the Spindletop find.

“It is the most fortunate thing that could have happened in connection with this well—that it is not illuminating oil,” J. H. Galey, a part owner of the Lucas well, told the Dallas Morning News soon after the discovery. “[T]here will be a good market for fuel oil when the country has had time to adjust itself to using liquid oil. The railroads will use it, every factory will make steam with it, and the steamships can carry much more power in oil than they can in coal.” What Spindletop produced, in other words, was a sudden volume of cheap fuel that had nowhere to go but toward transportation. “Spindletop transformed the fuel of light into the fuel of engines,” as wildcatter Michel Halbouty told me. Over the subsequent decades, the new cheap engine fuel would set dozens of other mechanized industries in motion, in turn helping to build a young democracy into an industrial and economic powerhouse.

In the meantime, there was much work to do in Beaumont. By 1902, hundreds of oil companies had been chartered to manage the economic risks associated with petroleum production and steer the whirlwind of activity. The building of refineries became just as important as the drilling of wells—crude was worthless until it could be processed. Wildcatters, investors, and refiners brokered casual partnerships—many over whiskeys at local saloons—that in some cases grew into corporations we still know today. Exxon (formerly Humble Oil), Texaco (formerly the Texas Company), and Gulf Oil all had their beginnings in Beaumont. Gulf Oil, for instance, was an outgrowth of Anthony Lucas’s legendary first gusher: William Mellon, one of the investors who had backed Lucas and then bought him out, also purchased many other successful wells in the area and established a refinery business, and the sum of these parts became Gulf.

The Texas Company, meanwhile, was founded by Joseph Cullinan, known as “Buckskin Joe” for his tough, unyielding persona. A former employee of Standard Oil’s pipeline division, Cullinan raced to the scene of Spindletop after the discovery and soon became one of Beaumont’s most successful oilmen. As he snatched up valuable leases in Beaumont, Cullinan also began building storage facilities 20 miles outside of town, giving him a big advantage over the majority of wildcatters who overlooked the need for infrastructure. He also built a pipeline from Texas to Oklahoma, establishing a major artery of southwestern petroleum distribution. By the end of 1901, he had begun consolidating his various oil producing and distributing operations into the Texas Company.

Mellon and Cullinan were among the many independent oil producers who grew out of Spindletop—brash, confident risk takers with keen instincts and the will to follow them. They quickly became formidable economic forces to reckon with—specifically, for Standard Oil to reckon with. By 1902, an estimated $235 million had been invested in the Texas oil boom alone. Standard Oil, the titan of the Northeast, was valued at less than half that: $100 million.

THE FIRST TYCOON

Looming two thousand miles north of the Texas bacchanal, at his Manhattan headquarters at 26 Broadway, was John D. Rockefeller. A pious, bespectacled, and impossibly austere man, Rockefeller had extraordinary reserves of restraint and self-control in an industry with barely a trace of either.

Rockefeller’s entrepreneurial instincts took hold in high school, when he dropped out his senior year to study banking, bookkeeping, and law at a professional school near his family’s home in Cleveland, Ohio. Three years later, with a partner and $1,000 of his own savings, he set up a company that packaged and distributed regional crops and meats. Just as Rockefeller was growing his young company, Edwin Drake discovered oil less than 150 miles away in Pennsylvania. As he watched demand for the illumination fuel escalate, Rockefeller became convinced of its enormous commercial potential. He acquired his first refinery in 1863, at the age of twenty-four, and had achieved near-total dominion over the production and distribution of oil in the United States by the age of forty.

A compulsively orderly and fastidious man, Rockefeller was never interested in the grimy, frenzied oil-prospecting side of the industry; it was making the end product and selling it to customers that intrigued him. He realized early on that it was much more profitable to let the wildcatters take the risks—let them grapple with the inevitable fluctuations and uncertainties of production—while he maintained tight control of the refining, marketing, and distribution of petroleum goods. Rather than fall victim to the fear and havoc created by boom-bust cycles, he found a way to benefit from them. Cheap oil prices offered him a chance to increase his stake in the market.

I sought out some insight on Rockefeller’s business acumen from Daniel Yergin, who invited me to his house. The walls were lined with history books, oil paintings, and tchotchkes from his many visits with industrial leaders of Russia, Asia, and the Middle East. Though Yergin spends much of his time analyzing reams of industry data, he takes a raconteur’s approach to the subject of oil, conveying its details as though reciting verses about mythic heroes and their deeds. “Rockefeller believed in oil,” he told me, clenching a fist for emphasis. “He knew in his gut that the market moved in cycles. So whether prices were high or low, whether there was flood or shortage, he was unfazed by short-term fluctuations and relentlessly focused on the future. Any drop in the price of oil was not a reason for despair but an opportunity to buy.”

Rockefeller’s mission was to buy up not just crude but also his competitors. Putting the competition out of business and acquiring their refineries, pipelines, and delivery fleets, as Rockefeller saw it, generated a positive feedback loop: the greater his control over refining and distribution, the more he could control the price of oil, therefore the better his position to topple more of the competition and amass a still-larger share of the market. When Rockefeller founded Standard Oil in 1870, there were some 250 refinery operations in the Northeast, Yergin explained, and by 1880 there were just a handful—and more than 85 percent of that market was under his control. Rockefeller’s reach extended far beyond refining: he aimed to commandeer all stages of the flow of oil, from the moment it surged from a derrick to its processing, packaging, and transportation to store shelves and gas pumps.

Standard Oil quickly became the most recognizable brand-name product in America. “That notion of this light fuel being standard—being reliable, consistent, and safe wherever you used it—was really a novel concept at the time,” Yergin explained. “Rockefeller created a national product in a country that had never had national products. We now think of brand names as a part of our lives, but they didn’t really exist until the Standard brand emerged.”

For all his success in spreading light and unlocking the power of the hydrocarbon, Rockefeller exhibited very little of the wildcatter’s exuberance for his product. He was as obsessed with controlling his words and emotions as he was with controlling volatile markets. A devout Baptist and lifelong Sunday school teacher, Rockefeller and his wife never drank, rarely socialized, and raised their children with the belief that pastimes such as square dancing were frivolous if not depraved.

“Do not many of us who fail to achieve big things,” he once conjectured, “fail because we lack concentration, the art of concentrating the mind on the thing to be done at the proper time and to the exclusion of everything else?” Rockefeller made it a rule to speak rarely, if ever, in meetings—letting his staff and competitors do the talking. “A man of words and not deeds is like a garden full of weeds,” went one of his credos. Another was summed up in a curious nursery rhyme he kept on his desk:

A wise old owl lived in an oak

The more he listened the less he spoke

The less he spoke the more he heard

Why aren’t we all like that old bird?

One Standard Oil staff member said of his dour boss, “He is the most unemotional man I have ever known.” An industry competitor commented, “I guess he’s 140 years old, for he must have been 100 years old when he was born.” But behind his expressionless veneer, the titan wrestled with anxiety: “I am eating celery which I understand to be very good for nervous difficulty,” he once wrote to his mother. A fitness fanatic, Rockefeller kept in his office an unusual rubber-and-wood exercise machine that he used daily to unwind.

He had good reason to be anxious. First, there was the mystery of the earth’s hidden resources—the extent of their abundance was beyond even Rockefeller’s control. As early as the 1920s—a decade that saw tremendous growth in U.S. oil production—geologists were predicting that U.S. petroleum supplies were about to run out. “The question at the heart of the oil struggle has always been: how much does the earth have to offer?” Yergin told me. “Skepticism over crude supplies is a recurrent malady of the business—it is in the first decade of the twenty-first century, just as it was in 1920 and after World War II and again in the 1970s.”

Rockefeller also had a deeper, ethical angst to contend with: he famously used cutthroat tactics to increase his control over domestic and international markets. He undercut prices so drastically that competitors had to shut down or sell out to Standard Oil. He commandeered the market for the barrels used to distribute oil so his competitors would have no way of packaging their product for customers. He negotiated an alliance with the railroads that transported oil between refineries and markets to get special, clandestine rates far below those afforded his competitors. He reportedly planted spies within competitors’ backroom negotiations to get advance warning on any new deals in the making.

Rockefeller expressed no outward remorse over crushing smaller companies in his pursuit of control. Instead, he celebrated it: “The American Beauty rose,” he famously reasoned in 1905, “can be produced in all its splendor only by sacrificing the early buds that grow up around it.” He described his tactics not as predatory but rather as an act of public service—eliminating what he considered to be the waste and inefficiency endemic to free markets, and ensuring reliable flows of oil and profits that were insulated from excessive volatility, overproduction, and periods of scarcity. Rockefeller believed that he had a divine duty to impose order on the chaos of the oil markets, and “that the Almighty had buried the oil in the earth for a purpose,” wrote Ron Chernow in his Rockefeller biography, Titan. The executive was known to have calmed his employees’ anxieties about market volatility with the assurance “The Lord will provide.”

For all his ruthlessness and eccentricity, Rockefeller was arguably good for America in the way that oil itself was good for America—both brought tremendous power and versatility to the American economy. Never before had a commodity been so widely distributed, so reliable, so profitable, and so meticulously managed. Rockefeller’s methods of vertical integration, price stabilization, efficiency, and economies of scale to this day inform the business strategies of the world’s most successful companies.

“What makes him problematic—and why he continues to inspire such ambivalent reactions—is that his good side was every bit as good as his bad side was bad,” wrote Chernow. Rockefeller also contributed roughly $550 million (the equivalent of about $12 billion today) in charitable donations to support education, medical research, and other philanthropic causes. “Seldom has history produced such a contradictory figure.”

The media and the public of his day were primarily concerned with Rockefeller’s bad side. While the federal government took its time in cracking the whip on Standard Oil’s more abusive tactics, the media flew into an investigative frenzy in the early 1900s. Leading the pack were journalists known as muckrakers—watchdogs who sought to expose behind-the-scenes misconduct within government and industry. Ida Tarbell, the daughter of a Pennsylvania wildcatter, spent more than six years bird-dogging Standard Oil, gaining the trust of its executives, plumbing its accounting books, and for the first time publicly exposing its inner workings. Her articles were published in a series of cover features in McClure’s Magazine from 1902 to 1904 and were then compiled into a tell-all bestseller, The History of the Standard Oil Company.

What is most noteworthy about Tarbell’s writings, beyond their shrewd analysis and detailed evidence of business corruption, are the more intimate passages in which the author paints a portrait of Rockefeller himself—a man she described as “the victim of a money-passion which blinds him to every other consideration in life”:

To know every detail of the oil trade, to be able to reach at any moment its remotest point, to control even its weakest factor—this was John D. Rockefeller’s ideal of doing business. It seemed to be an intellectual necessity for him to be able to direct the course of any particular gallon of oil from the moment it gushed from the earth until it went into the lamp of a housewife. There must be nothing—nothing in his great machine he did not know to be working right.

Tarbell saw Rockefeller—his greed, obsession with order, and chokehold on the competition—as the embodiment of all that was wrong with America, whereas independent wildcatters (like her father) embodied all that was right. “Life ran swift and ruddy and joyous in these men,” she wrote adoringly. “There was nothing too good for them, nothing they did not hope and dare.” It was a blatantly biased judgment, but nevertheless it voiced the opinion of many Americans: while Rockefeller represented caution and distrust, the wildcatter represented boldness and hope.

Yet Rockefeller and the wildcatters also shared strong commonalities. Above all, they shared the insatiable lust for more—the feeling that the industry must stop at nothing to find ever more distant, deeper, greater pockets of reserves. William Mellon, the Gulf Oil executive who invested in Spindletop, explained the common thread this way: “For a great many…the oil business was more like an epic card game, in which the excitement was worth more than great stacks of chips. None of us was disposed to stop, take his money out of the wells, and go home. Each well, whether successful or unsuccessful, provided stimulus to drill another.”