On this day in economic and business history...
Aug. 27 is one of the most important days in the history of the energy industry for two reasons: coal and oil. Let's take a look at the historic events that took place regarding both of these critical fuels, which combine to provide 56% of all American energy. We'll delve into another energy-industry milestone as well.
On Aug. 27, 1838, the Mauch Chunk blast furnace in Pennsylvania became the first industrial furnace to smelt iron with anthracite coal. This took place three decades after the first documented use of the harder, hotter-burning coal as a source of fuel, and it was the culmination of more than a decade of effort to put anthracite to work in iron furnaces.
The Mauch Chunk furnace turned out more than 100 tons of anthracite-fired iron before halting production in 1839, but its success was soon replicated. A year after the Mauch Chunk furnace went cold, the Lehigh Crane Iron Company began to fire iron with anthracite in its own furnace. By the end of the 1840s, there were 55 anthracite-fired blast furnaces in Pennsylvania alone, and by 1860, nearly 60% of total American iron-production came from anthracite-fired blast furnaces. Anthracite coal mining volume in the United States peaked in 1917 at an incredible 100 million tons, which means that more than 6,340 pounds of anthracite coal were extracted from beneath American soils every second of the year.
Anthracite coal production in the U.S. has declined dramatically since 1917, and today barely 2 million tons are mined each year. However, total coal production has not been hampered -- nearly 1.1 billion tons of coal was mined in the U.S. in 2010. The largest American producer that year, Peabody Energy (NYSE:BTU), dug up 146 million tons of that total.
The dawn of a new industry
The American oil industry was born on Aug. 27, 1859, when "Colonel" Edwin Drake struck oil 70 feet beneath the surface of Titusville, Penn. It was not the first time oil was extracted. In fact, naturally occurring "oil seeps" had been exploited for more than a thousand years, and accidental oil wells had been created for several decades prior to Drake's discovery by drillers who sought out subterranean salt brine. But it was the first time that a modern, purpose-built oil rig dug into the earth and found black gold. Drake's success set off an oil-drilling boom that has never stopped.
The Drake success story almost never happened. By chance, Drake happened to stay at the same hotel as the founders of the Pennsylvania Rock Oil Company (later renamed Seneca Oil), the first oil company in the U.S. His desperate need for work, as well as prior connections allowing him free rail travel, helped the inexperienced Drake wedge his foot in the door as the company's first drill foreman. Drake was hired in 1858 on an annual salary of $1,000 (equal to about $29,000 today) and was sent to drill the area near Titusville where oil seeps had been found.
Drake spent much of the next few months building a derrick in the style of existing salt-brine wells. The ground beneath Drake's derrick was loose with gravel and threatened to cave in the borehole before drilling had gone 20 feet down. Urja Dav of Pennsylvania State University explains the breakthrough that allowed Drake to keep drilling and eventually succeed:
In order to overcome the hurdles before him, he invented a "drive pipe" or "conductor," an invention he unfortunately did not patent. Accordingly to The Daily Picayune, "Mr. Drake conceived the idea of driving a pipe down to the rock through which to start the drill." Drake's invention drilled an average of three feet per day through rock and shale. Although the "drive pipe" caused some problems, it paid off on August 27, 1859 when at a shallow 69.5 feet Drake struck black gold.
By this time, Seneca Oil had abandoned Drake and his pursuits, refusing to help him out financially, causing him to use his own money and when that had run out, to borrow from friends. It is estimated that his well produced between 20-40 barrels daily, using all the whiskey barrels in Titusville. In fact, Western Pennsylvania produced half of the world's oil until the East Texas oil boom in 1901.
Unfortunately, Drake's failure to patent his drive pipe was only one of his devastating business missteps. Drake's former business partners took four years to pay him back for the successful discovery, and by this point he had lost his savings in the oil price crash of the early 1860s. From 1859 to 1961, the price of a barrel of oil had plunged from $20 to $0.52 (a 98% decline!) as many hungry prospectors moved in and freely made use of Drake's innovation.
Only 2,000 barrels of oil were produced in the U.S. in 1859. Annual production grew more than thousand-fold by the end of 1861 -- a year that saw American drillers extract over 2.1 million barrels of oil, mostly from Pennsylvania. This incredible year-over-year growth would not happen again in American history, although annual domestic production continued to grow well into the 20th century.
Oil production has since become one of the most important facets of the American economy. This has been reflected in Big Oil's numerous placements on the Dow Jones Industrial Average (DJINDICES:^DJI): Since 1915, oil companies have served for a cumulative 239 years as index components. ExxonMobil (NYSE:XOM) and Chevron (NYSE:CVX) have represented Big Oil on the Dow since 1928 and 1930, respectively (though Chevron was booted from 1999 to 2008, which proved a big mistake for the Dow).
The combined revenue of the five largest oil companies operating in U.S. markets -- ExxonMobil, Chevron, BP, Royal Dutch Shell, and ConocoPhillips -- was equivalent to more than 10% of American GDP in 2011. Domestic oil and gas claims to have contributed $476 billion to the U.S. economy in 2010, in the form of royalties, capital investments, wages, and dividend payments -- an "energy stimulus," according to the Energy Tomorrow project of the American Petroleum Institute.
(Backup) power to the people
The world's largest battery system was switched on in Fairbanks, Alaska on Aug. 27, 2003. The $35 million, 1,400-ton, nickel-cadmium monstrosity was built to prevent the cascading blackouts that plagued Fairbanks every other year and to forestall the constant threat of lesser blackouts in the icy town, which had no connection to an electrical grid. Built by a division of energy products specialist ABB (NYSE:ABB), the battery system is capable of generating 40 megawatts of power for up to seven minutes -- enough to keep 12,000 homes powered while the city's backup diesel generators are pushed into service.
The lessons learned in building Fairbanks' battery may help future projects far exceed its scale. A Chinese battery array, completed in 2012, can power a similar number of homes for up to an hour and is estimated to have cost half a billion dollars to construct. In 2013, Japan began building a monster battery system with nearly twice the capacity of China's, with the capacity to store 60 megawatt-hours produced by nearby solar arrays.
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