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Home , Gulf Oil, Humble Oil, Oil well, Spindletop

HoustonBusiness A Perspective on the Economy

FEDERAL RESERVE BANK OF • HOUSTON BRANCH • JULY 2002

Houston in 1900 producing unexpected riches and kicking off a frenzied Part 2. Houston and the Industry search for oil in Gulf Coast salt domes. Houston would capital- ize on these short-term riches with nearby oil fields, but more important, it would secure a By 1910 the The last issue of Houston long-term future in oil by mak- Business looked at the forces ing itself the focal point of a administration and that shaped the Houston econ- new Texas oil industry.1 management of Texas omy of 1900, primarily lumber This article examines the oil and cotton. Although lumber industry’s early development oil, as as much and cotton remained powerful and its shift from forces in 1900, the economic and Beaumont to Houston. of its equipment- momentum brought by the A future article will look at the manufacturing completion of the rail system 19th century rivalry between in Texas and exploitation of Houston and Galveston, the capacity, had shifted the Blackland Prairie and East importance of the 1900 hurri- Texas timber was rapidly com- cane and its effect on Hous- to Houston, and ing to an end. Houston would ton’s economic development need new sources of growth in in the 20th century. its consolidation the 20th century if it were to in Houston would continue to flourish. Oil in Texas Houston’s spur to growth in Significant oil deposits had continue steadily the new century would come been discovered in Texas long through the early from two seemingly random before Spindletop. Spanish acts of nature. In September explorers had used asphalt decades of the 1900 a great hurricane destroyed from Sabine Pass to repair the Galveston, effectively ending bottom of their ships in 1543, century. the Houston–Galveston rivalry and seeps of tar, asphalt and and clarifying the value of a had been docu- ship channel and an inland port mented in 18 Texas counties on the Texas Gulf Coast. Then by 1874.2 Many of these 19th in , the Spindletop century sightings were in East gusher near Beaumont came in, Texas, at locations such as Oil Figure 1 Texas Oil and Gas Since 1543

65,975 barrels in 1897 to 836,000 barrels by 1900, or just over 1 percent of the U.S. total.4 Because the development of the field was wasteful and chaotic, and because of problems marketing the Hardin Texas oil, the mayor of Saratoga Corsicana invited an North Batson Sour Lake experienced oilman to Dayton BEAUMONT inspect the field and Liberty Humble Spindletop suggest operational im- Harris provements. Joseph S. Goose Creek PORT ARTHUR HOUSTON Cullinan, who had gained Chambers Jefferson experience in all phases Pierce of oil development and Junction marketing as an em- GALVESTON ployee and manager for Galveston , recognized opportunity in Texas and immediately struck out with his own com- pany in the Corsicana fields. He signed long- term contracts with pro- ducers, organized the Springs in Nacogdoches County, Spindletop began in Corsicana gathering of oil from the fields, Sour Lake and Saratoga in in 1894. Although oil seepages built storage facilities and con- Hardin County, along White had been noted in the area, the structed the first significant Oak Bayou in Harris County Corsicana field was discovered refinery in the state. and in the vicinity of Spindle- by water drillers seeking a deep Although Spindletop and top in Jefferson County. artesian well. Like the rest of other Gulf Coast dis- A merchant named L. T. the Blackland Prairie, Corsicana coveries would soon dwarf Barrett and his three partners was suffering through the pro- Corsicana oil, it had a lasting drilled the state’s first successful longed agricultural depression effect on Texas oil history. First, in 1866 at Oil Springs.3 of the 1890s, and industrial Corsicana brought together Completed at 110 feet, the well water supplies would offer Cor- many of the key actors at produced 10 barrels of oil per sicana an opportunity to diver- Spindletop.5 Guffey and Galey, day, but further drilling in the sify away from cotton. Once for example, would finance the area failed. During the 1880s, the oil was found, a group of successful drilling at Spindletop however, success by subsequent local businessmen organized an and, with further funding from drillers turned Oil Springs into oil development company and the Mellons of , would the state’s first active oil field, bought leases in the vicinity of found Co. Cullinan— with a primitive refinery and the discovery. They brought in often recognized as the father oil gathering lines. Oil drilling two experienced of Texas oil—would come to was typically done using deep- drillers, James M. Guffey and Spindletop to rationalize pro- water-drilling cable rigs, all that John H. Galey, to test the field duction, storage and marketing, was available in in exchange for a half interest much as he had done at Corsi- during this era. These primitive in the production. Four of the cana. He would found the Texas rigs were often an important first five were productive, Co. and build it into a major oil cause of failure. and a significant oil boom was power, later known as . The most significant oil soon under way. Though oil drew a number development in Texas before Production rose quickly from of capable Texans to both Corsi-

2 cana and Spindletop, Corsicana for nine days. Successful wells of its equipment-manufacturing also set an early pattern of at Corsicana produced 20–40 capacity, had shifted to Hous- acquiring skilled labor and oil barrels per day; Spindletop ton. Beaumont became pri- field equipment from estab- production was 75,000–100,000 marily a regional refining area, lished oil-producing regions in barrels per day! distilling crude oil that arrived and Pennsylvania. Capital The Spindletop phenomenon by pipeline from other parts of also typically came from non- riveted the attention of every Texas, and Louisi- Texas sources. Just as the Mel- geologist and potential oil in- ana. The growth of an indus- lons financed Gulf Oil, the Pew vestor in the . trial oil infrastructure in Texas, family of became Trains arrived bearing tourists and its consolidation in Hous- a major influence at Spindletop curious to see the gusher. Leas- ton, would continue steadily and later Texas fields, using ing activity was frenzied, and through the early decades of Sun Oil Co. as a vehicle. Beaumont became the greatest the century. A second important factor at of all oil boomtowns. (Houston The most immediate impact Corsicana was the use of rotary even briefly billed itself as the of the Spindletop discovery was drilling. Introduced in the Dakota “Gateway to Beaumont.”) How- cheap fuel for local industry. Territory in 1882, this drilling ever, by spring of 1902 some of Cullinan, as part of his market- method was extremely success- the Spindletop wells ceased to ing efforts at Corsicana, had ful in the shallow Corsicana flow due to wasteful produc- worked with the Cotton Belt sands, cutting drilling costs per tion practices, and soon most Railroad8 to develop an oil- foot by two-thirds or more were producing more saltwater burning mechanism for locomo- compared with those typically than oil. This led to a major tives. The first successful run of experienced in the Pennsylvania fallout of producers who had a Cotton Belt passenger train oil fields.6 Walter B. Sharp origi- signed long-term contracts, and powered by oil had been from nated the method of using fluid exploration efforts shifted to Corsicana to Hillsboro in 1898. mud to plaster and hold up soft other area salt domes. Cullinan Texas railroads now quickly formations. Penetration of the and the Texas Co., with Sharp converted from wood or coal Spindletop salt dome was finally heading the exploration arm, to oil, as did street electric rail- accomplished with a rotary rig quickly found success at Sour ways, breweries, brickyards, ice moved from Corsicana and op- Lake in March 1902. Other factories and cottonseed mills. erated by former Sharp employ- Hardin County domes at Sara- The first pipeline to Houston ees. Rotary drilling innovations toga and Batson produced ended at oil storage facilities would become an important gushers within a year. Explora- located at the intersection of building block for Houston’s tion then moved on to Humble tracks for the Houston East and oil-machinery industry. (1905) and Goose Creek (1908) Railway and the The Spindletop area, with in Harris County. International–Great Northern its low hills, was unlike any A pattern quickly developed: Railroad. Cheap energy cut known oil-bearing geologic discovery of a salt dome gusher, costs, boosted profits and made structure in 1900. Reports from rapid and wasteful exploitation, the region more competitive. both the U.S. Geological Ser- production decline, then move- In 1905, the Texas Co. still vice and from state geologists ment to the next salt dome. operated from Beaumont, but had warned investors of no Olien and Olien described the Cullinan wrote to a colleague known scientific basis for oil to process as “a cluster of familiar in New York that “the time will be discovered at Spindletop. faces in a string of new loca- come—perhaps at no distant But once the salt dome was tions.” 7 day—when we want our gen- penetrated, what happened at eral office in Houston instead Spindletop made history. There The Oil Industry and Houston of Beaumont, as Houston had been previous gushers, but The Texas oil industry kept seems to me to be the coming after an eruption of mud and a significant presence in Beau- center of the oil business in the water, this one catapulted the mont through much of the first Southwest.” 9 The Texas Co. drill pipe over the top of the 10 years of the 20th century. did, in fact, move to Houston derrick. It unleashed a stream However, by decade’s end the in 1908, followed by Gulf Oil of oil twice the height of the administration and management in 1916 and regional Shell derrick that ran uncontrolled of Texas oil, as well as much offices in 1933.

3 The most significant pro- Hughes, Sr. manufacture of pipe fittings duction company to come out Sharp and Hughes had and other supplies for Texas oil of Houston itself began when twice given up on promising fields, and W-K-M Manufactur- Ross S. Sterling organized his wildcats—at Goose Creek and ing opened in 1920 to produce various oil holdings into Hum- Pierce Junction—because of rotary slips and pipeline valves. ble Oil Co. in 1911 and moved their inability to drill through By 1920, Houston was home to the offices to Houston the fol- hard rock formations with the the state’s most important con- lowing year. To attract volume technology of the day. Existing centration of oil field machinery purchase terms for his crude fishtail bits wore out quickly companies. oil, Sterling needed to be a and had to be replaced often, Refineries also came to the bigger producer, and he invited and they tended to produce a Houston Ship Channel. The a number of other producers hole that tapered to a narrower Spindletop legacy for the Beau- (almost all with roots at Spindle- gauge at greater depth. With mont area dwindled to three top) to join in a combined his partner’s permission, Hughes large refineries: the Gulf Oil and company. William S. Farish, took a vacation to concentrate Texas Co. plants at Port Arthur Robert L. Blaffer, Walter W. on the problem and arrived at and the Magnolia Oil plant at Fondren and Harry C. Wiess of a solution in just two weeks. Beaumont. It was Joseph Culli- Beaumont were among the Hughes’ famous design for a nan who established the criteria group that combined their rock bit consisted of cone- for a good refinery location in assets into the new Humble Oil shaped revolving cutters with Texas: large acreage, plenty of and Refining Co. in 1917. Stan- teeth that exercised a chipping fresh water, deepwater ship- dard Oil Co. of New Jersey or crushing action on the rock ping, and protection from bought a controlling interest under the weight of heavy steel storms and floods. Having wit- in 1919 but left management pipe. The new bit drilled a true nessed the 1900 hurricane and largely in Texas hands for many hole with 10 times the speed of another great storm in 1907, years. The company today is any existing bit.11 The Hughes Cullinan felt that both Galves- Corp. bit is still in use around the ton and Texas City failed the Although machine shops in world today. fourth requirement, leaving both Houston and Beaumont Sharp-Hughes Tool Co. was only Beaumont–Port Arthur and quickly learned to handle oil formed in 1908 to manufacture the Houston Ship Channel as field repairs, the growth of the the bit in Houston, and in 1910, viable alternatives. oil machinery industry was when more capital was needed, Among the early refineries slow. A highly developed rail the seemingly ever-present in Houston were Galena–Signal network and good water trans- Joseph Cullinan joined them as (1916), Sinclair (1918), Deep portation made shipment of a partner. Upon Sharp’s death Water Refining (1919) and tubular goods and refining in 1912, Hughes assumed con- Humble Oil and Refining (1920). equipment relatively easy, and trol of the company and later By 1930, eight refineries were established producing regions incorporated it as Hughes Tool operating on the Houston Ship such as Ohio, Pennsylvania Co. In 1917, a competing ver- Channel, running 194,000 bar- and West Virginia initially sup- sion of the rock bit emerged rels of crude per day.13 Despite plied most of this equipment.10 when Clarence E. Reed opened Cullinan’s reservations, Texas One important early path to a plant in Houston to produce City had four refineries by 1939. the development of a Texas oil the Reed roller bit and reamer. Simply dating the move- machinery industry was the in- Other early oil field machin- ment into Houston of major oil novative development and use ery examples in Houston can companies, such as the Texas of the rotary rig by locals. In be cited.12 James Abercrombie, Co. or Gulf Oil, or the birth of Beaumont, Parker Well Works a drilling supervisor, invented a new firms in the city, such as was an early provider of rotary device to prevent high-pressure Sharp-Hughes Tool, places the rig parts, using the manufactur- blowouts due to high gas pres- formative years for the city’s oil ing facilities of Southern Car sure; Harry Cameron revamped industry in the 1908–16 period. Manufacturing Supply Co. But his machine shop to produce The key moment in creating the real innovation in the indus- the preventer, opening Cameron Houston’s oil industry probably try was the product of partners Iron Works in 1922. In 1917, came earlier, however, in Walter Sharp and Howard R. Howard Smith Co. began the 1904–05, when several of the

4 most influential circles in the The circles that coalesced in Notes Texas oil industry converged Houston were more than sur- 1 For another look at this important on the city.14 Active exploration vivors; they were among the moment in Houston’s history, see of the Humble oil field, just most successful and astute in Harold L. Platt, “Houston at the Cross- roads: The Emergence of the Urban north of Houston, was under the industry. The nexus of Center of the Southwest,” Journal of way throughout 1904, and the knowledge and power in Texas the West 18 (July), 1979, pp. 51–61. first significant completion of oil had moved to Houston by 2 C. A. Warner, Texas Oil and Gas Since an oil well was in January 1904–05, and it continued to 1543 (Houston: Gulf Publishing Co., 1905, pulling many of the grow thereafter. Perhaps Hous- 1939). 3 W. T. Block, “Oil Industry in East Spindletop pioneers within ton’s initial attraction (as com- Texas Traces Roots Back to 1860s,” Houston’s sphere of influence. pared with Corsicana’s or www.wtblock.com/wtblockjr/oil5.htm Blaffer, Farish and Fondren Beaumont’s) to oilmen such as (first published in the Beaumont were all working in Houston Cullinan, Farish and Sharp was Enterprise, January 8, 2000). 4 by this time. its advantages as a regional John O. King, “The Early Texas Oil In- dustry: Beginnings at Corsicana, 1894– While Cullinan was contem- capital: superior communica- 1901,” The Journal of Southern History plating the future move of tions, transportation and infra- 32 (November), 1966, pp. 506–07. Texas Co. offices to Houston structure. These were the same 5 For a longer discussion of the business from Beaumont in 1905, he had factors that had made Houston circles that developed at both Corsi- already moved himself and his the center of the state’s lumber cana and Beaumont, see Diana Davids Olien and Roger M. Olien, Oil in family there from Corsicana; industry 20 years earlier, when Texas: The Gusher Age, 1895–1945 James Autry, Texas Co.’s chief most of the logs were being (Austin: University of Texas Press, lawyer, moved to Houston from cut in Beaumont. 2002), pp. 47–50. Beaumont the same year. For- But the earliest signal of a 6 King, p. 507. 7 mer Gov. James Hogg, a major permanent presence for oil in Olien and Olien, p. 43. 8 Officially known as the St. Louis and political power in oil and a Houston, the sign that it would Southwestern Railway. member of Texas Co.’s board be more than another in a 9 John O. King, Joseph Stephen Cullinan: of directors, took a suite at the string of stops for familiar A Study of Leadership in the Texas Rice Hotel and moved his faces, was the arrival of these , 1897–1937 Austin office to Houston. Both key actors and their families. (Nashville: Vanderbilt University Press for the Texas Gulf Coast Historical Walter Sharp and Howard To be connected to this knowl- Association, 1970), p. 182. Hughes relocated their families edge loop was absolutely cru- 10 Olien and Olien (p. 59) cite the exam- to Houston in 1904. cial in a volatile and risky ple of Oil Well Supply Co., which Olien and Olien describe industry, and many others manufactured its products in Pittsburgh the many “business circles” in would follow these influential and marketed them through outlets in Beaumont, Corsicana and Humble. the early days of Texas oil and pioneers into the city. 11 R. C. Gano, “Howard Robard Hughes, the need to be a part of these Such clustering of economic Sr.” in The Online circles to survive. activity, if successful, builds its (Austin: Texas State Historical Associa- own momentum whether the tion, 2002), www.tsha.utexas.edu/ [T]hose who settled into industry is oil, financial serv- handbook/online. 12 The examples are from David G. stable business circles…or ices, autos or software. The McComb, Houston: A History (Austin: combined their holdings, larger the cluster, the more University of Texas Press, 1981), pp. tended to endure in the specialized the knowledge and 80–81, and Olien and Olien, pp. 59–62. high-risk industry, function- skills inside it, making it more 13 McComb, p. 80. 14 ing as promotors in some attractive to those outside and, The timing of these personal and family moves into the city is noted in industries and investors in finally, making the cluster even Marguerite Johnson, Houston: The others….The lone wolves bigger as it attracts more par- Unknown City (1836–1946) (College at Spindletop who did not ticipants. This circular and Station: Texas A&M University Press, work within circles rarely cumulative process has brought 1991), pp. 126–27. 15 survived the decade as sig- oil-driven growth to Houston— Olien and Olien, p. 64. nificant players…[as] they both upstream and down- failed to spread the high stream—for over a century. risks of exploration and production over enough ventures.15

5 Houston BeigeBook July 2002

It has been a long year for turning to $26. Only the usual are currently 19 percent above Houston and for Texas. It doesn’t news seemed to move the mar- the five-year average level for matter whether you compute ket: OPEC, and an occa- this time of year. rates over the past three months, sional refinery glitch. Inventories six months or the whole year, remained high but were un- job growth in Houston and changed in recent weeks. Basic petrochemicals experi- other major Texas cities has demand is up enced strong demand in recent been consistently close to zero. only about 1 percent this sum- weeks, with prices rising sharply The latest news on Houston mer, and inventories filled early for ethylene, propylene and remains mixed. Upstream im- in the driving season. Inven- styrene. Profits improved sharply, provements in drilling were put tories and retail price have with higher product prices plus on hold by uncertainty over remained very stable in recent feedstock prices that were sta- energy prices, but downstream weeks. Refiners improved ble to falling. producers chemicals have seen recent profit margins from the dismal also pushed through a series of gains in sales and profits. The levels of the first quarter but price increases for polyethylene, Houston Purchasing Managers were forced to reduce produc- polypropylene, polystyrene and Index is pointing to local ex- tion runs to control inventory. PVC. Fundamentals have not pansion for the second consec- increased this much for all seg- utive month, but retail sales Oil and Gas Machinery ments of the industry, and high remain sluggish. Existing home After a turnaround in April levels of plant outages over the sales in June held up at last and a 16 percent rise over the summer may have created a year’s levels, while new home following seven weeks, the U.S. tightness for important products sales were off by 5 percent. By rig count flattened in June and such as ethylene that cannot the end of the year, the ongoing early July. The number of work- be sustained into this fall. U.S. recovery and a falling dollar ing rigs has fallen from 859 on should have most local indica- May 24 to only 840 currently. Housing Markets tors pointing upward again. International drilling, which Houston housing took dif- never experienced the deep ferent directions in June, with Retail and Auto Sales downturn seen in the United existing home sales matching Retail sales remain slow in States, has now been flat for those of June 2001, while new Houston, running 1 or 2 per- several months. Drilling and oil home sales were off about 5 cent behind last year’s. Because machinery suppliers say that percent. Low interest rates and retailers were not aggressive in sales have also flattened and a flight of funds from the stock stocking up, they’ve had few that pricing remains weak, with market seemed to be keeping inventory problems as a result substantial excess capacity. local housing markets strong of sluggish business. The recent drilling slow- despite slow job growth. The Auto sales, in contrast, down is attributable to uncer- improvement in existing home were up a striking 26 percent, tainty about the course of sales has to be viewed with but the increase is partly attrib- prices. Gas prices caution, as the coverage of uted to sales lost last year dur- weakened amid signs that inven- homes under the multiple list- ing Tropical Storm Allison. tories were headed for record ing service has expanded Year-to-date sales are off only levels this summer, barring recently to include some new 3 percent compared with the unusually hot weather that homes and nonbroker listings same period in 2001. could drain stocks. Inventories offered for a fee.

Energy Prices For more information or copies of this publication, contact Bill Gilmer at Crude oil prices have stayed (713) 652-1546 or [email protected], or write Bill Gilmer, Houston Branch, in a narrow range since late Federal Reserve Bank of Dallas, P.O. Box 2578, Houston, TX 77252. This publication is May, weakening briefly from also available on the Internet at www.dallasfed.org. $26 to $24 per , then re- The views expressed are those of the authors and do not necessarily reflect the positions of the Federal Reserve Bank of Dallas or the Federal Reserve System.