1. Oil: Black Gold (Texas Tea) in American Economic History Price V. Fishback Thomas R. Brown Professor University of Arizona

2. Petroleum: the Early Days Until 1850s: “Rock Oil” a Nuisance Whale Oil used in Lamps for lighting – Ahab Chasing Moby Dick around the Oceans Overfished Whale Fisheries – Had to go further Afield Result: 1849-1857 Oil prices nearly doubled Samuel Kier of Pittsburgh, PA developed refining of rock oil

3. Pennsylvania 1860s Big Discoveries in Western PA – Titusville, 1859 Whale Oil Prices Spiked Again During Civil War Boom Towns in 1860s – 100 new wells a month Environmental Concerns – Oil spilled out everywhere – Lightening strikes started numerous fires that burnt – Shipped in open tubs – Solved with Barrels and Pipelines First well

4. Oil versus Coal Rockefeller and Monopoly Coal was the dominant Fuel of the late 19 th Century (70 percent of mineral fuels through 1910) Yet, Oil production took off Doubled about every 8 years

5. Oil, Rockefeller and Monopoly By the early 20 th Century Standard Oil and John D. Rockefeller dominated the Oil Industry Complaints of Monopoly eventually led to antitrust suits in early 1900s. Led to Breakup

6. Oil, Rockefeller and Monopoly How did Standard Oil get so big? Through Predatory Pricing? Cut Price below own Marginal Cost, Drive others out of business, Raise Prices and Capture Monopoly Profits

8. Oil, Rockefeller and Monopoly NOT Predatory Pricing!!!!!!!!!!! Standard Oil CUT COSTS – Hundreds of production line improvements, reductions in costs off transports – Did take advantage of size to get railroads to provide rebates Standard oil cut prices below competitors’ costs (not own) Then purchased competitors Left owners in place as managers and taught them the cost- cutting techniques

9. Oil, Rockefeller and Monopoly Oil Pricing: Conflicting Forces Monopoly Power – Raise Prices – Lower Output Cut Costs (particularly due to Economies of Scale) – Lower Prices – Higher Output Cost Cutting Dominated as Prices Fell and Output Rose

10. Comparisons to Today Big Difference between Large Single Firm and modern OPEC Cartel – No cost cutting from the Cartels because stay separate Saving Graces in the Past 30 Year – Cartels are hard to maintain over long periods – Cartel profits draw innovators, new exploration, and new technologies – Driving force today is fracking and the opening of locations in Brazil, and other countries.

11. 20 th Century Trends

12. Uses of Oil over last 100 years About Half Gasoline Rest is fuel oil (40%), kerosene (5%), lubricating oil (5%) Wright from historical stats.

13. http://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=pet&s=mcrfpus1&f=a Downloaded 2/19/2015 U.S. Production Peak Early 1970s

14. U.S. Moves From Top of Production List to Third

15. U.S. Net Imports Rise Sharply

16. Downloaded 2/19/2015 from http://en.wikipedia.org/wiki/Peak_oil#Historical_oil_prices Long Run Price Trends, 1861-2006

17. General Trend Statements See Prices and Output Rising Demand Rise is the Dominant Change See Prices Falling and Output Rising – Supply Rise Dominates New Technologies, New Locations – Or Breaking up of Monopoly or Cartel Breakdown See Prices Rising and Output Falling – Cartels having success – Cost of Production or Environmental Regs Increasing

18. OPEC Flexes its Muscles, 1970s Doubled Oil Prices, Twice in a Decade Serious Problem because oil is an input and fuel for so many items and activities. Means a true rise in cost of activity. – Differs from General Inflation General inflation, all prices rise at same rate This means incomes, rents, prices, etc. all rise Can be neutral if anticipated Led to Bad Government Policies in Response

19. Downloaded 2/19/2015 from http://en.wikipedia.org/wiki/Peak_oil#Historical_oil_prices OPEC: World Price Doubled Twice, 1973-75 and 1977-79

20. OPEC Cartel and the Oil Price Problems of the 1970s Sovereign Countries Flex Their Muscles Oil Price Spikes 1973-1975, late 1970s Macroeconomic Insanity, as a Result Nixon’s Wage and Price Controls Expanding Money Supply to Accommodate Difference Between Rise in Input Costs and general Inflation Attempts to Control with Price Ceilings

21. OPEC Price Spikes Part of Cause for Bad Macroeconomic Policy 1960s. Low inflation and low Unemployment. Economists thought we had macroeconomic policy figured out. 1970s Stagflation

22. Bad Monetary Policy Tried to Expand Money Supply to stimulate the economy when Oil prices rose. Oil Price Spike made production more costly, led to higher unemployment, lower output growth U rate rose from 5 in 1973 to 8 percent in 1975 Monetary Policy Response – Increase M to reduce unemployment – Problem: could not stimulate output, – Just led to more inflation – More anticipated inflation

23. Bad Monetary Policy Essentially, U.S., UK, European Countries all tried this twice in response to oil shocks. Inflation rate Went from 3-5% in early 1970s to 10-13% in late 1970s and early 80s Could not get U rate below 6 percent and then it spiked above 7.6 in 1979 and around 9.7 in 1982-1983.

24. Inflation Policy WIN buttons with Gerald Ford SNL spoof of Carter – In other words, our economic system is screwed, blued and tattooed! We just have to face the fact that there is simply no way to fight inflation – Inflation is our friend – Who Doesn’t want to have a $10,000 Suit and a $400 car. – Need More Money. Call the Engraver up and print more – Inflation is our friend

25. Bad Microeconomic Policy Price Controls on Gasoline and Natural Gas Led to shortages Hidden costs – Waiting in line, nondollar costs – Official gas price not reflect full gas price

27. For the Rest of the Story