A History of Disruption in the Energy Industry

The long history of disruption and innovation in oil and gas. How will it respond to the inevitable changes ahead?

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The energy industry — oil and gas (O&G) in particular — is often characterized as a lumbering behemoth, opposed to innovation or change in favor of a traditional manner of operations. Its tendency to stay outside of the national media cycle, with the exception of environmental hazards, obfuscates the amount of innovation happening in the industry. In reality, the oil and gas industry has been the subject of tremendous upheaval, disruption, and redefinition since the Industrial Revolution. History demonstrates to us that the industry — instead of being opposed to innovation or immune to disruption — is eager to adopt and apply new techniques that improve efficiency and profitability.

A bird’s eye view of the oil and gas industry shows a general trajectory of growth and improvement, but impacted by several crucial events that have disrupted and nearly up-ended the contemporary industry. Disruption takes many forms — active innovation, accidental innovation, government regulation, and geopolitics — but each derivation has affected the O&G industry since the industrial revolution. This post will illuminate some of the more pivotal disruptions in O&G history in an attempt to demonstrate that the industry will continue to respond, innovate, and improve in the face of future developments.

The use of naturally-occurring oil and gas resources has a history dating back thousands of years. Daily use, however, was restricted, sporadic, and isolated in geographic areas. Not until the Industrial Revolution did a true global economy emerge. This economy was facilitated by the formation of businesses, advancements in chemistry, and improvements in technology. The unique factors which combined to facilitate the Industrial Revolution created the earliest identifiable signs of what we today identify as the expansive “Oil and Gas Industry.”

The invention of the steam engine in the early 1700s brought coal into the international economy. Initially, wood was used to power steam engines. It was a renewable source, globally available, and easily obtainable. Quickly, however, coal — long known of but infrequently used — was recognized as vastly more efficient, powerful, and clean relative to wood.

This was the first disruption the O&G industry encountered: what to do when confronted with an efficient, cheaper, cleaner resource without a global infrastructure to support it. Instead of forcing the continued use of wood, the earliest businesses and entrepreneurs scaled the extraction of coal to previously unimaginable levels. Deep shaft mining expanded in the UK, and the region soon became the single largest energy exporter in the world, becoming the first energy monopoly. As ships powered by steam engines traversed oceans, the need to restock their engines sparked coal mining operations around the world. A true, competitive global energy marketplace had begun.

The oil and gas industry emerged out of a need for energy created by the invention of the steam engine. Early in its history, O&G faced its first disruption — the chemical superiority of coal over wood. In a matter of decades, the industry had invested in coal to such a degree that it became the first worldwide energy economy, driving international trade and globalization. Coal powered the world and, in the US at least, continued to dominate energy usage for another two centuries.

“Petroleum” as a category refers to both “crude oil” and “petroleum products,” of which there are many. Crude oil is the naturally-occuring mix of hydrocarbons located and extracted from underground. It is oil in its rawest, most unrefined form. Petroleum products refers to any number of final, consumer products that are created by refining crude oil (often with the addition of other liquids). Two petroleum products particularly relevant for this post are kerosene and gasoline.

Oil has been extracted and used — like coal — for thousands of years as a source of energy, fire, and light. Not until the mid 1900s, however, did companies begin actively drilling in order to obtain and refine oil for extensive purposes. The widely-accepted first modern oil well was drilled in present-day Baku, Azerbaijan in 1848. As the first to invest in oil, the region supplied 90% of the world’s oil by 1860, signifying early on a shift in geographic energy influence away from the coal magnates of the west.

In 1859, Colonel Edwin Drake drilled the first widely-accepted commercial well — i.e. with an entity attached to the project — in Pennsylvania. Throughout the East and West, early companies and engineers dug and drilled other small wells, gradually supplying the burgeoning market with more oil and setting the stage for global expansion.

Kerosene today is used infrequently for portable burners and scientific purposes, and makes up just 0.1% of petroleum refinery output in the US. In the 1800s, however, kerosene became a crucial daily product for the lighting of lamps. The successful refinement of kerosene from petroleum in the late 1840s signified another disruption in the O&G industry at large.

For generations, whale oil had provided light to much of the industrial world and became a tremendous contributor to the global oil and gas economy. As whale populations decreased and the Industrial Revolution facilitated more chemical experiments, alcohol blends began replacing whale oil as lighting fluids. In particular, camphene — a mix of ethyl alcohol, turpentine, and camphor oil — became the fluid of choice for lamps. By the time kerosene was effectively refined from petroleum and recognized as a superior lighting fluid, neither of the other two existing industries were robust. The O&G ecosystem as a whole was faced with investing in a tried-and-true, but at-risk industry (whaling), a fledgling practice (camphene) with a few decades of headway, or a brand new industry (kerosene) with barely a handful of functioning wells and no established infrastructure.

Kerosene’s efficiency, transportability, and low cost caused it to come out on top. Until electricity’s expansion in the early 20th century, kerosene was the primary source of light in the industrial world and the dominant product refined from petroleum. Kerosene refinement was the driving force in the initial investment into oil in the second half of the 19th century, and facilitated the establishment of standards, infrastructure, and business models that would endure for generations.

In the late 1800s, two inventions disrupted — and consequently catalyzed — the energy industry at large: Intensive research into electricity and the internal combustion engine.

Electricity — in particular, the successful patent and production of the light bulb — ushered in the Second Industrial Revolution. Electricity was cheap, more plentiful, and safer than lamp fluids, and the market for kerosene declined rapidly. The global oil and gas industry, however, had already spent decades building foundational infrastructure for an energy future fueled by oil extraction. Towards the end of the 19th century, the internal combustion engine had been refined to a capable technology and was seeking a real-world application. Automobiles were emerging onto the market, but with no immediately-superior source of power, early models were divided between an older technology (steam engine) and two newer technologies (electric and internal combustion engine).

The distillation of gasoline from crude oil proved to be the linchpin. Gasoline provided automobiles with range and relative ease of use, despite the emissions and the noise. Moreover, the infrastructure the O&G industry had poured into oil excavation had paid off. In 1901, the famous Spindletop discovery in Texas flooded the US market with crude oil and promoted more investment in the industry. By 1919, gasoline was outselling kerosene and the oil and gas industry had found its new golden egg.

Throughout the first half of the 20th century, rapid globalization, industrialization, and infrastructure investment grew the international oil economy. Russia, the US, and the Dutch East Indies emerged as early magnates. Explorations into the Middle East, however, began heralding back to the early success of Azerbaijan. Starting in present-day Iran, explorations expanded into Turkey and Kuwait. In the 1940s, the Ghawar oilfield was discovered in Saudi Arabia. To this day, it remains the largest oilfield ever discovered.

Disruption, however, not only comes from inventions and geographic expansion. Regulation plays a major part, and the government began heavily involving itself in the O&G industry starting in the early 20th century. By the first decade of the 20th century, John D. Rockefeller’s Standard Oil Company, founded in 1870, had grown to control the overwhelming majority of US refining capacity. In 1909, the Supreme Court split Standard Oil into seven separate companies in response to anti-trust laws. Standard remained strong, but the division weakened singular Western control over the global market and provided room for emerging oil regions to establish themselves as major players.

By the mid 1950s, a paradigm shift in the centuries-old oil and gas industry had been realized. For the first time, gasoline surpassed coal as the primary source of energy in the US. Oil now powered the world.

Following WWII, the oil industry grew in global prominence as countries began leveraging their natural resources to claim a seat at the table. In 1960, the Organization of the Petroleum Exporting Countries (OPEC) formed with founding members Iran, Iraq, Kuwait, Saudi Arabia and Venezuela. The formation of OPEC was the clearest signal that O&G would not stay in control of the economies of the West and, in fact, allowed for previously-subjected regions to enact control over “developed” countries.

This shift of global power towards the East was particularly visible during the 1973 Oil Crisis, when members of OPEC placed an oil embargo on countries supporting Israel during the Yom Kippur War, including the US, UK, and Canada. The embargo sparked widespread price shocks and forced governments to ration oil and establish national speed limits.

International concern over oil supplies were exacerbated by the 1973 crisis, and reports emerged suggesting the world’s oil reserves could be depleted by 2000. In the 1990s, however, the oil and gas industry confronted its most recent major innovation and disruption with the improvement of hydraulic fracturing, shale extraction, and directional drilling. The combination of these three technological advancements dramatically increased oil and gas yields from previously-unexplorable regions. For the US, the inventions initiated an O&G renaissance as companies and regulators began thinking about what an energy-independent future might look like for the country.

Today, the top three oil- and gas-producing countries are the US, Russia, and Saudi Arabia. Since the 1700s, other countries have come and gone as the world’s largest energy producers: namely the UK, Azerbaijan, and the Dutch East Indies. History shows us that the path forward for the oil and gas industry — though consistently upwards — is far from straight or smooth. Centuries of disruption has caused the industry to convulse and recover as it responds to innovation, regulation, and geopolitics.

The question then becomes, what is next for the oil and gas industry? History has demonstrated that when faced with disruption, the oil and gas industry will invest in infrastructure and development that allows the most efficiency and profit. Today, the industry also has an eye towards reducing environmental impact. Blockchain technology stands as the most innovative technology to have emerged in the past decade. The implications for privacy, selective transparency, coordination, and efficiency are unmatched. Oil and gas is ripe for the kinds of disruption blockchain technology allows: enterprise consortiums, collective data exchanges, back office improvement, smart contract implementation, tracking resources, commodity trading, and more. The decentralized disruption is on the horizon, and many industries are keen on implementing the technology. Along with showing us how the oil and gas industry has successfully responded to disruption, history also warns us that the companies, business models, and regions that ignore disruption, fail to innovate, or choose the wrong innovation are quick to disappear from international importance. The future belongs to the country, the company, and the government that embraces disruption and molds it to their advantage.

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