AMERICA’S INVESTMENT IN PETROLEUM
A perusal of the foregoing chapters should correct any vague impression
in the mind of the reader that the oil business is a lucky adventurer’s
game like placer-mining, where a man may find a pocket of nuggets, wash
them in his pan, and thus become possessed of sudden wealth. This used
to be the popular impression in the days when the phrase “Struck Ile”
was synonymous with a sudden stroke of luck. Undoubtedly the man who
chances to own lands on which oil in paying quantities is discovered is
blessed with good fortune, especially under modern conditions whereby
fair and generous treatment is assured to him. But he contributes
nothing to the expensive processes by which the precious liquid is
extracted from mother earth, and risks no capital in the experiment.
Perhaps more prevalent and fraught with infinitely greater
possibilities in loss and disappointment is the delusion that oil is
a speculator’s game; that the very words “oil” or “petroleum” in a
promoter’s advertisement are a guarantee of large dividends and soaring
values. This delusion has no doubt been nourished by the fact that
some large private fortunes in the United States have been accumulated
almost entirely in the oil business. Countless people of a speculative
tendency have loosely associated oil with great riches, and cherished
the theory that whoever became associated with the production or
refining of petroleum was necessarily, as if by magic, assured of large
and easily acquired profits. The oil fortunes loom large in the public
mind because they have been concentrated in comparatively few hands;
and the fact is overlooked that these fortunes have been based not
merely on the raw product, but on progressive methods of distribution
and the elimination of waste. It is obvious that when the vast scope of
the industry is considered and the fortunes arising from it are set off
against the volume of sales, the financial returns are not spectacular.
For every man who has made a fortune in oil, there are dozens who have
earned but a bare subsistence from it, and others who have failed even
in that, for they have sacrificed all in efforts to locate new wells.
In previous chapters the arduous and costly labours which precede the
process of distribution that begins with the conveyance of oil into
the pipe-lines have been described. It should be borne in mind that
more often than not these labours are unproductive. Oil does not bubble
forth from springs; it conceals itself in the bowels of the earth and
it is rarely that it even betrays its presence unmistakably by surface
indications. When the subsequent outlay in handling the product of
even a gusher is considered, the vast capital outlay involved can be
visualized. The investment required by initial measures for locating
and producing crude petroleum is so great that competent authorities
can name more than one locality in which the money put into leases,
construction, drilling and plant exceeds the gross value of the oil
that has been obtained or can ever be forthcoming from these fields.
Many millions of dollars during recent months have been poured into
oil company flotations that in all likelihood will never yield any
return whatever. Even well-organized companies, directed by men of
experience, seldom prove bonanzas in a day when leases command very
high prices; the exception arising where the company happens to be the
first comer in the field that later develops important production.
The oil business partakes of the nature of most other industries; it
yields profits when fortunately located and economically operated. But
there is no certainty that even the company which possesses leases in
established fields will prove profitable. Under the circumstances it is
ridiculous to assume that mushroom promotions, by men with no actual
experience in the oil business, and whose talents lie rather in the
direction of writing advertisements, can yield profits to those foolish
enough to invest in them.
The experience of one of the large producing companies, operating in
the best fields of this country, financed exclusively by oil men and
directed by some of the ablest men in the business, may be cited as an
instance of the uncertainty of profits. This company produced about
five million barrels of crude oil in 1919 and sold at the relatively
high prices then being obtained. Nevertheless, the company’s profit
and loss statement for the year showed a net loss of approximately
$1,000,000. This does not mean, of course, that this company is a
liability to its owners. It may have expended in work that could not
properly be capitalized, large sums of money that will eventually
be repaid out of production. It is easily conceivable that without
any material increase in its investment its yield of oil might be so
augmented by 1921 as to make its business show a very handsome profit.
What this case does prove is that something more than good leases,
experienced men and ample capital is needed to insure large returns
from money put into oil promotions.
People who clamour against the prices exacted by producers of crude
oil overlook the fact that wells have an unfailing habit of playing
out. This means that a producing company must never cease drilling and
exploring. To do so would mean an early decline in its production and
eventual failure even of its best wells. The monetary return from a big
producer must not only offset the cost of that well but repay the owner
the cost of drilling a large number of dry holes, abandoned after large
expenditures.
Production in the United States is only kept up by the work of the
“wild-catter” in locating new pools and by more intensive drilling of
the old fields. Both involve heavy costs. There were drilled in this
country last year no fewer than twenty-nine thousand new wells, but the
net increase in production over 1918 was but twenty-two million barrels
of crude. The declining yield of wells necessitates amortization to
cover the cost of new wells to take their place.
Figures purporting to show the aggregate by which the investors of the
United States have enabled this country to become the dominant factor
in world production must be considered in light of the fact that such
totals are in a large measure merely estimates. It is not possible to
obtain detailed statistics covering the cost of drilling that has gone
for naught; but an approximately accurate estimate can be reached by
striking an average based on the experience of leading companies.
It is fair to estimate production at $1,000 per barrel of daily yield,
multiplied by the current price for that grade of crude. On this basis
Oklahoma leads all other fields with production valued at $958,517,000.
The fields in north and central Texas are worth on this basis
$617,690,000 while California is third with a total of $456,443,000.
On the basis of the country’s production in February, 1920, California
produced almost exactly the amount of crude derived from Oklahoma,
274,966 barrels per day, in the one case, as against 273,862 in the
other, but the posted price of Oklahoma crude was $3.50 per barrel as
compared with $1.66 for the lower grade California product. The daily
average production in February, taking the country as a whole, was
1,130,759 barrels, and the value of that oil at the current price was
$3,541,511. This would give an approximate valuation of the country’s
production, on the basis assumed, of $3,541,511,000.
Discovery of a new pool means a race to lay pipe-lines in the field
to relieve the temporary storage tanks which are generally of limited
capacity. Oftentimes, a considerable investment made in anticipation of
large production is rendered almost valueless by the early exhaustion
of new wells or by their failure to maintain anything like their flush
production. These lines in the different fields are known as gathering
pipe-lines. They are connected with main trunk pipe-lines running
to the various refining centres. According to the Bureau of Mines,
there are at this time approximately thirty-two thousand miles of
trunk pipe-lines and eleven thousand five hundred miles of gathering
lines. At the present day replacement cost, this mileage is worth,
respectively, $360,000,000 and $40,000,000, a total of $400,000,000.
The money actually invested for the existing pipe-lines is probably
considerably less than this sum by reason of the fact that a great deal
of mileage was built prior to the present era of high costs, but it
is a safe assumption that the pipe line system represents an actual
investment of not less than $300,000,000.
The United States is over-equipped with refineries, measured by
their ability to obtain the necessary crude oil to operate them to
capacity, but it is not over-supplied from the standpoint of the
potential demand for refined products. On the first of January,
1920 there were three hundred and seventy-three refineries, with a
daily capacity of 1,530,565 barrels. Since that date there have been
completed ninety-nine more refineries, adding 263,500 barrels to the
daily capacity. Even before the completion of these new refineries,
it was estimated in the report made by the United States Geological
Survey that the country had a surplus refining capacity of 177,000
barrels per day over the production and importation of crude oil. Since
that time the surplus capacity has been increased to about 500,000
barrels daily. Averaging the cost of the complete refineries with
those of the much less costly skimming plants, the refineries of the
United States represent a total investment of about $1,795,000,000.
This total includes real estate and much equipment not ordinarily
associated in the public’s mind with the business of refining. There
is, for instance, at several of the larger refineries valuable wharf
and railroad terminal property, extensive manufacturing plants for the
production of tin containers, factories for the manufacturing of steel
and wooden barrels, foundries, machine shops, pattern shops, etc.
As a reserve between the current daily production and the refineries’
consumption there is always above ground a stock of crude petroleum
awaiting its turn to pass through the pipe lines, this stock varying
greatly according to the demands of the refineries and the rate of
production in the fields. In April, 1920, the crude stocks on hand
totalled 124,873,000 barrels, which was worth at the prices quoted in
the different fields at that time, $393,724,580. In addition, there
were large quantities of refined stocks in the course of treatment at
the plants. The gasoline alone reported on hand March 31st was valued
at more than $125,000,000, while the kerosene on hand as of the same
date was worth approximately $35,000,000. Lubricating oils, fuel and
gas oil, wax, coke, asphalt, crude oil awaiting distillation and
miscellaneous products on hand brought the total value of the refinery
stocks up to $370,000,000.
There is, of course, a very large investment in the fleets required
both for bringing crude oil to the refineries in this country and for
carrying finished products to the markets of the world. On January 1,
1920, there were six hundred and seventy-eight tankers engaged either
in the oil business or as supply ships for the navies of the world,
and of these, three hundred and ninety-four, with a deadweight tonnage
of approximately 1,500,000, were under the American flag. This fleet
represents an investment of $250,000,000.
The minor phases of oil marketing are represented by the multitude
of stations, warehouses, bulk barges, tugs, motor trucks and tank
wagons, tank cars, private railroad sidings, storage tanks, etc. in
all parts of the United States. It is customary to allow an investment
of $4.00 per barrel for the real estate and equipment needed to do
a retail marketing business, and $1.00 per barrel for the tanks and
docks required in the fuel oil department. On this basis the domestic
marketing equipment for the country represents a total investment of
approximately $660,000,000.
No attempt has been made here to bring in the investment by American
oil companies in other lands. The principal item under this head is,
of course, the huge sums that have been expended in drilling and the
acquisition of producing properties, leases for development and for
surveys, etc., in Canada, Mexico, South America, Roumania, and other
countries. The value of the tankers used for foreign service has been
estimated but no allowance is included for stations and other equipment
to handle petroleum products abroad.
We have here an aggregate investment in the production, transportation,
refining, and distribution of petroleum and its products of
$7,310,000,000. With this equipment, the United States last year
produced 377,000,000 barrels of crude oil from within its borders and
imported 55,000,000 barrels more, chiefly from Mexico. We exported
366,000,000 gallons of gasoline, 965,000,000 gallons of kerosene,
1,175,000,000 gallons of gas and fuel oil and 276,000,000 gallons of
lubricating oil. Against that may be set our domestic consumption,
showing that while we produced in this country more than two-thirds
of all of the world’s petroleum, we consume in almost the same ratio.
There was marketed in the United States last year 3,426,000,000
gallons of gasoline, 1,397,000,000 gallons of kerosene, 6,290,000,000
gallons of gas and fuel oil, and 568,000,000 gallons of lubricating oil.
These figures show not only the immensity of the oil industry but also
make clear the vast extent and variety of the auxiliary investment it
calls for. Clearly it is no speculator’s game, but one in which the
most expert knowledge and economic discretion are entailed if it is to
yield profits at all.