A Big Day for the Dow and a Bigger Peak Oil Myth

On this day in economic and financial history ...

Jan. 19 has been a day of great corporate triumphs -- and one staggering failure -- for four different present and former components of the Dow Jones Industrial Average (DJINDICES: ^DJI  ) . Let's run through them one by one.

Telegraph dominance
On Jan. 19, 1881, Western Union (NYSE: WU  ) consolidated its market share as the world's largest telegraph operator by acquiring both the American Union and Atlantic & Pacific telegraph companies for a combined price of $19.1 million in stock. This added about 46,000 miles of telegraph wiring and 329 offices to Western Union's rapidly expanding operations. This same day, members of Congress began to probe Western Union to determine whether its prices were fair, in light of the fact that the company was clearly growing into a monopolistic power over the country's young telegraph industry. Three years later, as inquiries deepened in the Senate, it was revealed that Western Union controlled a total of 432,000 miles of telegraph wiring, whether owned or leased. Western Union became part of Charles Dow's earliest index in 1884 and joined the Dow proper in 1916. It was removed in 1927.

Lighting the world, one town at a time
Thomas Edison successfully lit Roselle, N.J., with the world's first overhead-wiring electrical system on Jan. 19, 1883. Wires from a central generating station connected a general store, a railway depot, about 40 houses, and 150 streetlights to the power of sweet direct current, Edison's preferred method of electricity transmission. This gave Edison's Electric Light Company a big PR boost and helped him persuade other towns to light up. By 1892, Edison's innovations had helped to create General Electric (NYSE: GE  ) , which quickly became the country's leading purveyor of both electricity and the gadgets and gizmos that required it. GE has been part of the Dow since 1907.

Keeping up with the Fords
The postwar years were good to General Motors, which announced a massive $1 billion expansion program on Jan. 19, 1956. That was in addition to $2 billion already poured into capital expenditures between 1946 and 1953. During this period, the number of automobiles the American public owned had grown from 28 million to 46 million, and then to 54 million by the end of 1956. Later that year, President Eisenhower would sign the Interstate Highway Act into law, validating GM's big bet on the popularity of the automobile. General Motors held a place on the Dow from 1925 until its bankruptcy during the 2008 financial crisis.

A dinosaur in the PC age
IBM
had one of the worst days in corporate history on Jan. 19, 1993, and it couldn't even blame its misfortune on a recession or other macroeconomic woes. That day, the computing giant reported a $5 billion annual loss for the 1992 fiscal year, which was at the time the worst such loss in American corporate history. The loss was not unexpected in light of the floundering company's brutal layoffs and well-known financial woes, which had both come to light in 1992 following reports of IBM's first-ever annual loss in 1991. The PC price wars had devastated IBM's bottom line, as a 50% increase in unit sales during the holiday quarter had actually resulted in a revenue decline. This terrible performance, though, wasn't a total loss for IBM, which hired Louis Gerstner as CEO later in 1993. Gerstner is widely credited with transforming IBM into the successful services-focused company it is today. Gerstner's guidance was a boon to the Dow after 1993 -- IBM has been part of the index since 1979 but trailed it during the early '90s.

The peak oil myth begins
Peak oil has a longer history than you think. Although the models that define the American peak oil hypothesis were first advanced in the 1950s, predictions of the imminent depletion of American oil reserves can be found much earlier. In fact, one of the earliest known warnings that the United States would run out of oil was released on Jan. 19, 1922, when the U.S. Geological Survey warned the public that only two decades of oil remained in the ground, if present consumption patterns held steady.

That day, the survey reported that there remained 9.2 billion barrels of oil in the ground but warned that not all of it could be discovered, let alone extracted. The survey's director somberly announced:

"Unlike our reserves of coal, iron, and copper, which are so large that apprehension of their early exhaustion is not justified, the oil reserves of the country ... [appear] adequate to supply the demand for only a limited number of years. The annual production of the country is now almost 500 million barrels, but the annual consumption, already well beyond the half-billion mark, is still growing."

Of the 9.2 billion known barrels of oil, the survey estimated that all but 200 million were recoverable, with Oklahoma, California, and the Texas-led Gulf Coast region dominating the available reserves. The director claimed that the estimates were "undoubtedly the best that have ever been made for the United States, and better than have hitherto been prepared for any oil country or district of the world."

This was a world only 11 years removed from the Standard Oil breakup, and only nine years removed from Ford's (NYSE: F  ) first assembly line. Ford had not yet built its 10 millionth car, which would roll off the assembly line to terrific fanfare two years after the Geological Survey's report. The United States had approximately 12.3 million registered automobiles in 1922, many of which were Ford's Model T's with fuel economies ranging from 13 to 21 miles per gallon. The value of Standard Oil's successor companies had grown fourfold in the decade following its dissolution, spurred in part by a spike in oil prices that had tripled the cost of a barrel of oil between 1916 and 1920.

Oil exploration companies had managed to double the amount of oil extracted annually between 1911 and 1921, but yearly automobile registrations had increased by more than an order of magnitude (from fewer than 900,000 in 1911) in the same period. At the same time, American electric utilities had been increasing their capacity by about 12% a year from the turn of the century onward, and many of these plants were oil-fueled -- as were an increasing number of factories. America's voracious appetite for cars, electricity, and mass production seemed nearly limitless at the beginning of one of the most incredible booms in history. At the time, it seemed that these dire warnings might be worth heeding.

However, as you're well aware, this doomsday scenario did not come to pass. In the two decades leading up to World War II, from 1922 to 1941, America's total oil production would total 19.3 billion barrels, and the price per barrel declined from a nominal price of $1.61 in 1922 to $1.14 in 1941 -- the equivalent of a real price drop of 20%. America's oil production didn't reach its annual peak until 1970, during which the total oil extracted from American fields was 3.5 billion barrels, or nearly 40% of all the oil the U.S. Geological Survey thought remained five decades earlier.

In 90 years of production since this colossally wrong prediction, the United States has extracted a total of 198 billion barrels of oil, more than 20 times the amount originally thought available for extraction. In 2011, the five largest oil companies operating in the U.S., including former Baby Standards ExxonMobil, Chevron, and ConocoPhillips (NYSE: COP  ) , combined to generate revenues that were equivalent to more than 10% of U.S. GDP for that year. The three American-based oil supermajors alone combined for annual oil-equivalent production of 3.2 billion barrels in 2011 -- much of which was natural gas, as total U.S. oil production by itself accounted for only 2.1 billion barrels in 2011.

The peak oil hypothesis may have merit over the very long run, but it's been disproven so often on shorter time frames that we have to accept that it's folly to predict the availability of resources in the future using only the knowledge available to the present.

Global demand has pushed oil prices to a consistently higher level than we've ever seen before, peak oil or no peak oil. There's no end in sight to these higher prices, so you ought to find profits where you can. The Fool has a free report titled "Three Stocks for $100 Oil" that offers you a trio of lesser-known companies that are making big bucks off of the demand for unconventional oil exploration. Want to learn more? All the information you need is here -- click here for full access, at no cost.


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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 19, 2013, at 10:54 AM, Ghung wrote:

    Virtually all previous peak oil predictions have fallen victim to as-yet-to-be-discovered major oil reserves (with the possible exception of Hubbard). As no major discoveries have been found in decades (since Alaska, North Sea, Cantarell), and also that current decline rates are high, especially where enhanced extraction methods are being used, It will be flow rates and cost that determine the next peak, which will be the last true peak we will see. This is under way now, and the downward curve will be severe. Indicators are persistent high prices and falling consumption, lower net energy returns, and indeed, articles like this one. We can't wish the inevitable peak oil predicament away, as much as we would like to. One need only do the math.

    I suggest folks go to TheOilDrum.com and search articles related to 'The Red Queen" and "ELM' (export land model) which involves the rate at which major oil exporters are increasing their internal consumption, and predicts when many major exporters will become net importers.

  • Report this Comment On January 19, 2013, at 11:00 AM, jpn70 wrote:

    "America's oil production didn't reach its annual peak until 1970 [...]"

    +

    "The peak oil hypothesis may have merit over the very long run [...]"

    =

    ??

  • Report this Comment On January 25, 2013, at 3:06 AM, DrGoldin wrote:

    I, for one, am rooting for the peak oil hypothesis to be correct, because it will force us to move beyond oil for our energy needs. In fact, I think very dark days are ahead if the peak oil hypothesis doesn't come into play soon.

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