The Day That Launched Big Oil and the Electronics Industry

On this day in economic and business history ...

Two notable economic events occurred on Oct. 20, and their combined impact has been keenly felt on the Dow Jones Industrial Average (DJINDICES: ^DJI  ) over the years. These two events -- the first confirmation of major oil reserves in America, and the creation of the first useful vacuum tube -- have been directly responsible for the long-term success of six current Dow components, and they've also been responsible for the inclusion of more than a dozen other companies that could not exist without the foundations laid on this day in history.

A gusher of proof
The American oil industry began with the success of Edwin Drake's well in 1859, but during its early days the rough-and-tumble world of small-time drillers with scant output never gave the world any outward sign that it might be any more than a transient phenomenon. Drillers might strike a respectable source only to see it dwindle quickly as other producers tapped the same reservoir, confined to a small range of land near the site of the Drake well in Titusville, Pa., with their own nearby derrick. Something had to happen to convince reputable businessmen that this oil business might be worth real investment, and that something took place on Oct. 20, 1861, when William Phillips struck a gusher at Oil Creek, Pa.

The Phillips well, which spouted out 4,000 barrels of oil a day, was confirmation that economically significant oil resources lay beneath this once-picturesque part of western Pennsylvania near the shores of Lake Erie. It was the third major "fountain" well, as they called gushers in those days. The first, drilled nearby by Captain A.B. Funk, had come in with 300 barrels per day in May but was already running low and would become stopped up by the end of the year. Another well drilled on the same Funk property, christened the Empire well, came in with a gusher of 3,000 barrels per day in September. The Phillips well exceeded both, and its roaring spout of black gold flooded nearby Oil Creek and covered the landscape in an oily sheen before it was finally brought under control.

The Empire and Phillips wells unleashed a literal flood of oil on the barely formed refining industry. Pennsylvania's oil regions, which had accounted for all of the 500,000 barrels of oil produced in America in 1860, produced 2.1 million barrels in 1861 and more than 3 million barrels in 1862. Oil prices -- which had already crashed through the floor from $20 per barrel in 1859 to $0.52 per barrel on the eve of discovery -- collapsed further to a mere $0.10 per barrel by the following year, which would be akin to just $2.35 today. The Empire well soon tapered off, but the Phillips well continued to gush for a decade, setting early industry records: It produced a stable 3,660 barrels per day six months after coming under control, and by the time it ran dry it had brought up nearly a million barrels. Both records stood for more than two decades.

These early strikes had another notable impact on the development of the oil industry, as they soon enticed young shipping magnate John D. Rockefeller to invest in his first refinery. The torrent of oil out of western Pennsylvania, in Rockefeller's own words, produced a "harvest time in which such large [refining] profits were reaped by the saloonkeepers and preachers and tailors and men from all the walks of life who were fortunate enough to find an oil still." The Civil War put refined oil products to myriad uses, and Rockefeller, already successful at an age when most men were either fighting in the war or finishing college, wanted a piece of the action.

His operation, christened Andrews, Clark, and Co. (the 22-year-old Rockefeller deferred on titling the business to his older partners), opened with a $4,000 investment in 1863 on the outskirts of Cleveland. Rockefeller took an intense interest in his new business, working alongside his employees to save a few cents on costs wherever possible. Before long, he had established a comprehensive business model that made him the undisputed lord of this new industry, which led to the formation of Standard Oil seven years later. When Standard Oil was finally broken up in 1911, its "Baby Standards" eventually reformed into two current Dow components, ExxonMobil and Chevron. A number of automakers and aircraft manufacturers, whose machinery would not be possible without large supplies oil, have also graced the Dow over the years.

Going long for the first time
Dr. Lee de Forest announced the successful development of a three-element vacuum tube, a "triode," on Oct. 20, 1906. This development was as important to the progress of communications technology as the rapid leaps from vacuum tubes to transistors to integrated circuits would be for computing nearly five decades later.

This triode, which DeForest christened the Audion, was the first vacuum tube capable of amplifying electrical signals, a breakthrough that made long-distance communications possible. This characteristic of the technology wasn't discovered for another six years, but once it was, it was quickly put into use in radio as both receivers and transmitters, allowing practical radio broadcasts for the first time. Its amplifying properties also had an important role in the spread of long-distance telephony.

Once the practicality of the Audion was determined, large electrical engineering companies -- particularly AT&T (NYSE: T  ) and General Electric (NYSE: GE  ) -- quickly improved on the original design, launching the era of modern radio broadcasting. In 1913, AT&T purchased de Forest's Audion patent and General Electric's Irving Langmuir released an updated triode called the Pliotron, launching what is now known as "electronics," which in its simplest definition is technology that uses active (typically amplifying) electrical components.

Both AT&T and General Electric obtained tremendous benefit from the triode. The telephone monopolist inaugurated its first transcontinental telephone service less than three years after de Forest's announcement, and GE launched RCA, the Radio Corporation of America, in 1919. The triode was perhaps second only to the internal combustion engine in the minds of investors and the consumer public during the Roaring '20s, which saw both telephones and radios proliferate across the country. RCA itself became "the speculative symbol of the time" as its shares gained a staggering 30,000% over the course of America's greatest bull market.

The triode, and later improved vacuum tubes, also served as the technological basis for the earliest computers -- ENIAC used some 18,000 vacuum tubes, and IBM (NYSE: IBM  ) also relied on vacuum-tube computing to refashion itself as a business computing powerhouse until well into the 1960s.

The new industrial revolution
Oil was the most important resource of the 20th century, and electronics became the foundation of the biggest technological breakthrough since the Industrial Revolution. Today, new breakthroughs present the world with an opportunity to race into the future faster and farther than most people can imagine. It all begins with the next big technological breakthrough, which -- appropriately enough -- often relies on oil byproducts to function properly. Read all about the biggest industry disruptors since the personal computer in "3 Stocks to Own for the New Industrial Revolution." Just click here to learn more.


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