In another article, we told the story of Edwin Drake and how he managed to begin the first large scale crude oil extraction in America. This was in 1859, in Pennsylvania. Much has changed since. What might not be so well known is the fact that shortly after, America experienced a new thing for the world: a shock in oil prices.
Drake’s well was not a very successful endeavor in the long term, even after a generally successful beginning. When Drake went into operation,the concept of an oil well was basically non-existent. People knew that the earth held oil but it was not yet known that large deposits of oil could exist deep underground. When Drake helped make this public knowledge, he introduced a lot more oil to the market.
Drake introduced a large spike in supply. He also opened America’s eyes to the possibility of more wells in the future, as other people took a nod from Drake’s leadership of Seneca Oil. This increased supply and the promise of more to come depressed prices down from around $20 per barrel to around half of that during 1860. For context, this reduced price was still over $200 in modern dollars. By the end of 1860, the price of crude oil had been shocked, and this effect was increased due to the world not yet knowing that an oil well could actually run out of oil. As prices dropped, there was an ever-decreasing incentive to enter this new industry.
Those who know American history will know that just after this, in early 1861, the American Civil War began. The war had a profound effect on the demand for crude oil. Crude oil prices shot up higher than anyone had ever seen, along with smaller price increases for all other goods. The demand for crude was pushed much further by taxes against alcohol-based lighting fuels. Suddenly the crude oil industry was looking incredibly important.
The war and other factors pushed crude oil to a higher price than it had ever seen. By 1864, the price reached $121 dollars a barrel, which is around $2,000 in today’s dollars. That’s approximately 30 times the current price for a barrel of crude. Truly astonishing, especially when you consider that this demand came from a time before automobiles.