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TheStreet Open House

What Would Rockefeller Do in Today's Oil Boom?

Stocks in this article: KMI TCP CP

NEW YORK ( TheStreet) -- About 150 years ago a wholesale grocer from Cleveland took a business trip. You could now drive the distance in just a few hours, and the grocer was determined to see the market circus. He was appalled by what he found.

It was the first oil boom. The government needed kerosene for lamps and paraffin for bullets to bring southern states back into the Union. The entrepreneurs of Oil City, Pa., and the surrounding area were supplying it by pouring oil into whiskey barrels, piling them high onto horse-drawn carts, and then whipping those horses in a frantic effort to reach tiny refineries that could turn the oil into something useful.

It was filthy, it was dangerous, and the grocer saw it was incredibly inefficient. As you may have guessed by now, the grocer's name was John D. Rockefeller, he was a Union man and an abolitionist. His trip taught him that pure capitalism -- red in tooth and claw -- was not going to eliminate that waste.

So, as biographer Ron Chernow wrote in Titan , he took control. Rockefeller organized the railroads against the entrepreneurs and eventually built a pipeline to get crude to scaled, coastal refineries at maximum efficiency. It was secretive, it was a monopolistic "trust" and not a market process, but it worked. Costs declined and profits were maximized.

We are now going through another oil boom, and Rockefeller would find its problems familiar. In North Dakota's Bakken field a third of the natural gas coming up with the shale oil there is being flared, reports the Oil and Gas Financial Journal. That means it's burned at the wellhead, and as a satellite image from the Christian Science Monitor shows , the flaring is visible from space. The U.S. is now wasting more natural gas than any other country.

A smaller-scale problem exists in Texas' Permian basin, where Oilprice.com notes there isn't enough pipeline capacity to get all the new oil to market. Local prices were almost $10/barrel below the world price in November, according to Oilprice, costing producers $1.2 billion/year.

The transport problem is even worse in Canada's "oil sands" play. Mining.com reports that, due to a lack of infrastructure, oil produced by strip-mining bitumen and processing it is now bringing just $45/barrel , about half what Texas oil is fetching.

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