When oil became black gold

Texas, Alaska, Russia, the Middle East – these are the regions one is likely to think of when asked to name the world’s top oil-producing areas.

Galicia, an area of Eastern Europe now divided between Poland and Ukraine, would probably not make it onto anyone’s list. And yet, 100 years ago, Galicia ranked as the third largest oil producer in the world.

It was the Kingdom of Galicia back then, a part of the sprawling Austro-Hungarian Empire. Oil was discovered there in 1894, and production reached a peak in the early years of the 20th century. In fact, there was so much oil that the major problem for producers was finding people to buy it.

And yet, by the time World War I began in 1914, production had fallen off dramatically, leaving the German-led forces without sufficient means to fuel a modern mechanized military. The Allies, on the other hand, continued to obtain abundant supplies from Russia and the United States, leading Lord Curzon, later British foreign secretary, to remark after the war’s end that “the Allies floated to victory on a wave of oil.”

The rise and fall of the Galician oil industry is the subject of a new book by Assistant History Professor Alison Frank. She was drawn to the subject not out of a fascination with oil or economics, but through an interest in Austria-Hungary – the multinational state with its capital in Vienna, whose writers, artists, and scientists played a vital role in giving birth to the modern era.

Her book, “Oil Empire: Visions of Prosperity in Austrian Galicia” (Harvard University Press, 2005), tells a sad tale, one to which those who extol the free market economy as a cure-all for society’s ills would do well to pay attention, although Frank emphasizes that the book is not policy-oriented.

“It’s not a case study aimed at telling policymakers what not to do in Kazakhstan, although I do think there are certain lessons to be learned,” she said.

Although the Hapsburg Empire of Austria-Hungary is known for exerting strict control over most of its citizens’ activities, the oil business was an exception to the rule. Unlike most other European countries, whose governments regulated the extraction and sale of oil, Austria-Hungary left mineral rights to petroleum in the hands of private landowners. The only other country to follow this policy was the United States.

But what the United States had that Galicia lacked was John D. Rockefeller and his company, Standard Oil. By concentrating on transportation and distribution rather than production, Rockefeller was able to achieve economies of scale and to make sure demand met supply. By the early 20th century, he was able to undercut Galicia’s prices, even while selling oil to its near neighbors.

The result of Austria-Hungary’s hands-off policy was a plethora of small producers pumping oil out of the ground at a faster rate than it could be sold, eventually bringing on a price collapse. One reason for this situation was that in the early days of the industry, uses for oil were limited. At first it was employed only as a lubricant and to treat skin diseases in animals. The invention of kerosene and oil lamps created new markets for the substance, but it was not until the development of the internal combustion engine that demand really took off.

But Galicia, which had always been a poor region, failed to profit from the explosion in oil consumption. The oil supply began to dry up just when it was needed most, as Austria-Hungary and its ally Germany entered the Great War. Meanwhile, unregulated production had resulted in social unrest and environmental disasters. When lightning struck Galicia’s largest oil well in 1908, the result was a conflagration that covered 12 acres and became a tourist attraction.

What can be learned from the Galician experience? One possible lesson is that allowing an industry to develop without regulation is not always the best policy.

“In this case, leaving the development of the oil industry to free market forces was not to the advantage of the industry, the government, the workers, or the local environment,” Frank said.

Another lesson Frank gleaned from her research is the value of flexibility.

“I was taken aback by how unpredictable the development of energy sources has been through history. Coal comes out of nowhere and then becomes a must-have item. For decades oil is sold as a lighting product, then it becomes the world’s most important fuel. Our dependence on oil is really very new, and we really have no idea what sources of energy are out there and will become important in the future.”