Wednesday, November 18, 2009

Business Lessons from a Ghost Town - Pithole, Pennsylvania

Just off a dirt road in the Western Pennsylvania mountains is a large, slightly overgrown field alongside Pithole Creek. Today, it could be mistaken for any old, out-of-use field. But 150 years ago, a city of 15,000 sprang up on this farmer’s field, and then largely died out within a year’s time. Events of that year, in this city known as Pithole, still affect our daily lives today, including the genesis of one of the world’s largest companies. Can we apply these lessons to today’s social media boom?

Economic History of Pithole

Pithole, Pennsylvania doesn’t sound like an enticing locale, but it is one of the best examples of an economic boom town created by a new technology, in this case the discovery of oil at the dawn of the oil age. Due to its exceptionally rapid rise and fall, Pithole provides a window into how people of the era adapted- or failed to adapt- to rapid economic, industrial and societal change.

After Colonel Drake and “Uncle Billy” Smith sunk the first successful drilled oil well in 1859 in the Crawford and Venango County area of Western Pennsylvania, the local farmers started to drill for oil on their own properties. In January 1865, one farmer discovered oil on his land near Pithole Creek, with the first well producing 250 barrels of oil a day. With the rapid influx of drillers into the surrounding area, oil wells started to sprout up all around Pithole.

By April 1865, 3,000 Teamsters, using horses and wagons, were hauling oil barrels out of the valley. By May 1865, Colonel AP Duncan and George Prather purchased the land around Pithole creek from the farmer landowner for $25,000, and then laid out the 500-lot city of Pithole. By September, Pithole was home to 15,000 people, along with 57 hotels, a newspaper and the third-busiest post office in Pennsylvania.

At its peak, Pithole area oil production was 6,000 barrels a day. Soon, a 1,000 seat theater was built and featured a constant retinue of sold-out shows performed around the clock. Saloons, stores, brothels and a Methodist church were all hastily established in the town.

But the increasing number of closely-spaced wells drained the oil reserves very quickly, and by January 1866, there were only 4,000 residents of Pithole. From a farm field, to a city, and then back to a town, all in one year.

After fires consumed much of the poorly-constructed buildings in town and with new wells being discovered in adjacent areas, Pithole’s population declined to 2,000 people by December 1866. By 1870, only 281 people still lived in Pithole, and it ceased to exist by 1877, being purchased by the county government for $4.37.

Why did Pithole disappear so quickly?

Today, Pithole, reached by driving down a small and winding country road, reveals only the rough outline of streets and foundations.

But by looking over the fields, walking down the still-visible outlines of the streets and studying the historical markers, a snapshot of industrial history emerges…and many business-related questions spring to mind.

Beyond the shear fascination of exploring a unique site that sprang from nothing to a full-fledged city and back to a field in a surprisingly short period of time, what about the people who came to find fortune, either by drilling wells or selling items or services to the drillers and others in the burgeoning population?

Interestingly, town “fathers” Duncan and Prather did not sell the land lots in Pithole, but rather leased them for only a few years. At the end of the lease, the land and whatever improvements were left at that time reverted to Duncan and Prather. As a result, period photos of Pithole show a ramshackle combination of hastily-assembled wooden buildings, towering oil wells and very muddy streets.

The main street featured the banks, the higher-end hotels and other proper businesses, while streets higher up the hill featured lower-end hotels, boarding houses, saloons and thinly-disguised whorehouses. The water reservoir was nearby, and was quickly overwhelmed by the population growth. It was said that, in Pithole, whiskey was both cheaper and cleaner than the local water.

This rental land market, with the resulting lack of motivation to improve the buildings and property, attached very few Pithole residents to the town. Further, the lack of a scalable town infrastructure created less-than-desirable living conditions, increasing the incentives to move on to the next oil discovery. And, when a fire burned down much the shoddily-constructed town, there was no incentive to rebuild.

On a societal level, the rule of law was not firmly established, with a committee of vigilance melting out a skewed form of justice and sometimes violent business conflicts.

Why did Pithole rise and disappear so quickly? On one hand, the lack of basic society-reinforcing elements such as land ownership, rule of law and abuse of the “commons” structurally doomed Pithole’s future. But, on the other hand, the flow of people from well discovery to well discovery created an economic incentive to maximize the wealth-creation from the transient population, which would move along quickly in many cases.

Of course, the most important reason for the fast decline of Pithole was the decline in oil production. But many other towns in the region continue to exist to this day, so the lack of societal building elements certainly played a role.

Pithole Innovations That Still Affect Our Lives

Another striking characteristic of Pithole was the intense competition to both drill for oil and transport the oil. The Teamsters originally hauled the 42 gallon leaky wooden barrels of oil over the mountains for $1 a barrel, with a 25 cent return fee. This soon rose to $3 a barrel as the standard 6 barrel load quickly broke down the livestock hauling the wagons.

Previously, oil discoveries were fairly close to established towns, rivers or railroad lines. Pithole was the first oil field that was located far from standard transportation routes.

Seeing a new market in moving oil over rough terrain, several groups started to build oil pipelines to Pithole from established towns or rail depots. Samuel Van Syckel solved the technical problems by lap-welding a 2” cast iron pipeline, using pressure-tested joints to keep the oil from leaking. By adding steam-powered pumps, his line could efficiently move 2,000 barrels of oil a day over the five miles to the Miller’s Ferry railroad station.

Since the pipeline charged only $1 a barrel for transport and could transport 81 barrels of oil in an hour, the Teamsters were quickly forced out of business. Almost as quickly, the oil pipeline started to suffer mysterious calamities. Soon, armed men patrolled the oil pipeline by day and night. This dynamic played out on the other oil pipelines which quickly sprung up in the region to take advantage of the new technology.

The oil pipeline right-a-way soon carried a telegraph, to both help with documentation of oil volumes from specific clients and a means of emergency communications. And, since the railroads were no longer transporting oil only in wooden barrels, they quickly developed the oil tank car.

One remnant of the old wooden oil barrels of the Teamster era is that, in the US, a barrel of oil is still a 42 gallon measurement.

Many of the new oil pipelines of the day ran into financial difficulty, but the new concept of oil pipeline transport was proven at Pithole. This created the impetus for improved industrial communications and accounting methods, as well as creating a new method of transport for the railroads and, later, in competition with the railroads.

One man was studying these developments at the time. He decided that transporting the oil, a constant business, was preferable to drilling for the oil, a boom-and-bust business. By using the new technology of the day, he founded The American Transfer Company in 1874, which later became The National Transit Company. He also ran a better-known company, Standard Oil. His name was John D Rockefeller. The National Transit Company building, built in 1890, still stands in nearby Oil City.

Fast forward to today, was the Dot Com boom of the late 1990’s setting the stage for an entirely new form of distribution? Not oil distribution through pipelines, but rather information distribution through the online pipeline of social media? And, just as Standard Oil grew out of the ashes of the oil boom, is Google on its way to becoming the next Standard Oil?

Looking over the cold, scrubby hillside at Pithole and reading the worn historical displays, it’s hard to imagine the radical industrial economic changes that emanated from this boomtown, changes that continue to impact the world we live in today. But, even though industrial history sites tend to be overlooked today, a little digging reveals that their impact still resonates through the years.

Personal Site Visit, October 2009,_Pennsylvania
Titan: The Life of John D Rockefeller Sr, Ron Chernow, Published 1998