Oil: A Driving Force in the U.S. Economy
(Published: Fall 1999)
A chronicle of the oil industry’s history illustrates how ups and
downs in oil prices have increasingly influenced the nation’s economy.
The Birth of an Industry
Booms and busts have
been a part of the oil industry since its birth in 1859 when Edwin Drake
drilled the world’s first oil well in Pennsylvania. The frenzied drilling
that followed Drake’s success unleashed a supply of oil far exceeding the
needs of the limited market, causing prices to plunge. Because the nation
relied on wood and coal during this period, oil prices had little impact on
the economy. This soon changed, though, as the United States grew increasingly
dependent on "black gold," the liquid fuel that would propel it into
a global economic superpower.
1880-99: Rockefeller’s Reign
Founded in 1870, John
D. Rockefeller’s Standard Oil Company dominated refining in the 1880s and
1890s, creating efficiencies and expanding markets through its control of
nearly every aspect of the industry, including transportation. As the nation’s
appetite for oil grew, reserves declined in existing fields, leading to higher
oil prices at the end of the century.
1901: Oil Boom
The 1901 discovery of
Texas’ first major oil well, the Spindletop, launched a new era in the oil
industry. The well tapped a vast reservoir that is credited with expanding the
U.S. oil refining business into a major industry and with encouraging
large-scale exploration outside the Northeast where Rockefeller’s Standard
Oil had long dominated the industry. However, the sudden increase in supply
caused oil prices to plunge from 1900 to 1910.
1908-20: Age of
the Automobile
Within half a century
of the oil industry’s birth, petroleum had begun to revolutionize travel by
powering the world’s first airplane in 1903 and by ushering in the age of
the automobile. Henry Ford’s mass production of the Model T, which began in
1908, opened up mechanized travel to average Americans and created a large
market for gasoline that was to grow unabated for decades. Motorized
transportation also was used for the first time on major battlefields during
World War I. Oil consumption increased dramatically during this period, with
prices more than doubling from 1910 to 1920 as the number of cars and trucks
on American roads grew from fewer than 500,000 to more than 9 million.
1930: Supply Surge
As the roaring ’20s
drew to a close, the nation’s oil demand suffered an unexpected setback when
the U.S. stock market collapsed and the Great Depression began in 1929. The
effect on oil markets was exacerbated by Columbus "Dad" Joiner’s
discovery of the massive East Texas field the following year. The combination
of this surge in supply just as demand faltered caused inflation-adjusted oil
prices to fall to record lows in 1931.
1933: Texas’
Swing Capacity
In 1933, Texas’
growing oil supply gave the state the necessary swing production capacity to
influence oil prices nationwide. For the next several decades the Texas
Railroad Commission, which was vested with oversight of the state’s oil
industry, and similar agencies in other states reduced price volatility by
regulating production.
1939-45: World War II
Price controls and
government rationing throughout the economy helped stabilize oil prices as
world governments interceded in the marketplace to ensure an oil supply for
the military during World War II. The specter of low energy prices and the
increase in the nation’s gross domestic product for the war effort resulted
in a rising stock market in the early 1940s: the Dow Jones Industrial Average
rose 46% from 1941 to 1945 in inflation-adjusted terms.
1950-70: Post-War
Economy
Following World War
II, the nation entered an unprecedented period of economic growth and rising
energy demand. Domestic oil consumption more than doubled from 1950 to 1970,
fueling the United States’ rise to a global economic superpower. Oil prices
remained fairly stable under the de facto price controls of producing states
that began in the 1930s.
1973-79: Rise of
the Middle East
By 1973, U.S. oil
production entered into an irreversible decline and virtually all of the world’s
spare production capacity was in the Middle East. Emboldened by this shift in
power, the Organization of Petroleum Exporting Countries (OPEC) sought to
control oil prices by restricting its oil production. Later in the year, the
Arab Oil Embargo was enacted. Oil prices soared, creating a ripple effect
throughout the U.S. economy. Inflation rose and the stock market plummeted 48%
from 1972 to 1974 in inflation-adjusted terms. A similar situation occurred in
1979 when the Shah of Iran was ousted, with the resulting high oil prices
causing inflation to soar again.
1980-89: OPEC
Fades
Oil prices fell in
the last half of the 1980s as oil-producing regions such as the North Sea
brought new reserves on line, challenging OPEC’s dominance. This era of low
oil prices ushered in the unprecedented bull market for stocks that continues
today: from 1987 through 1998 the Dow Jones Industrial Average more than
tripled in value in inflation-adjusted terms.
1990-91: The Gulf
War
Oil prices leapt
upward in 1990 as supplies declined following Iraq’s invasion of Kuwait. The
ensuing rise in oil prices was a major contributor to the U.S. economic
downturn in 1991. In inflation-adjusted terms, the Dow Jones Industrial
Average fell 8% in 1990.
1998: 50-Year Lows
The dynamic impact of
oil prices on the economy was clearly evident in 1998, when oil prices,
adjusted for inflation, fell to a low not seen in more than half a century.
Inflation sank below 2% to its lowest level in more than three decades, and
the stock market steamed ahead with the Dow Jones Industrial Average rising
15% in inflation-adjusted terms.
Several events
converged to cause the sharp plunge in oil prices. OPEC production increased
just as an unforeseen economic crisis began in Asia. In addition, Iraq’s
allowed oil production quota was increased under the United Nations’
sanctions, and a mild winter in the Northern Hemisphere lowered demand for
heating fuels.
1999-2000: End of
a Century
The United States is
closing the 20th century with a decade of unbroken growth, its economic engine
fueled in part by low oil prices that helped keep inflation, interest rates,
and recession at bay. As history has shown, though, oil prices have rarely
stayed stable for long. During the first half of 1999, oil prices rebounded
from 1998’s historic lows, driven upward by a reduction in international oil
supplies combined with growing demand around the world.
The History of Oil and Gas Main
Page and Contents
|
