Houston’s History: Becoming the Oil and Gas Capital of the World

Houston has long been known as the oil and gas capital of the world — with good reason. In fact, Houston is a key component of my energy investment thesis series. If you’re looking to invest in oil and gas, the Houston area is a great place to get started: it’s the perfect place to find investors, the heart of the Texas oil boom, and the energy capital of the world.

What is it that sets Houston apart? Many factors worked together to turn Houston from simply another city into an energy powerhouse that has the potential to change the shape of the world.

A Look at Present-Day Houston

If you drive through Houston today, you’ll find a number of features that showcase the city’s place as the energy capital of the world. In Houston, energy, oil, and gas dominate as they do nowhere else in the world. Consider:

• Houston is home to more than 500 oil and gas exploration and production firms.
• Houston houses hundreds of firms that provide supporting activities to the oil and gas industry.
• Houston is home to nine refineries that process 2.3 million barrels of crude oil every day (which makes it one of the biggest crude oil producers in the world).
• The Energy Corridor, which stretches for 7 miles along Interstate 10, encompasses many businesses engaged in energy operations.
• Houston may soon end up with a second energy corridor due to the continuing expansion of local businesses.
• Houston houses more than 4,600 energy-related companies.
• The city alone employs around 1/3 of the jobs across Texas in gas and oil extraction.
• Houston is the center of foreign investment in energy.

[I cannot predict what will happen to Houston regarding the current turmoil and events…this post will be updated in time…read on]

1901: Houston Begins Its Oil Journey

Before 1901, Houston was home to farmers and cattle ranchers. It was filled with flat land and ripe with opportunity. While Houston had contained a port of entry since July 1870, it had not yet become an incredible hub of oil, gas, and energy production.

In 1901, all of that would change.

Thanks to drilling begun in October of 1900, drilling on Spindletop reached a depth of over 1,200 feet in January of 1901. Out came natural gas, quickly followed by a gusher of crude oil: a fountain that shot up more than 150 feet above the ground. This was a previously unheard of height that transformed Houston forever. Before this, no one had ever seen the like of a 150-foot gusher. It produced between 80,000 and 100,000 barrels of oil per day.

Beaumont vs. Houston: Competition to Become the Oil Capital of the World

With the Spindletop gusher producing incredible amounts of crude oil, cities in the area hurried to compete over who would ultimately take the top position as the energy capital. What came next, however, no one could have imagined. With Spindletop located just 85 miles from Beaumont, it seemed obvious that Beaumont would rise to become a key player in the energy game. In fact, for a time, Houston was billed as simply the “gateway to Beaumont,” which had the Neches River port downtown and two other deep water ports within a handful of miles. Beaumont didn’t need to dig channels to bring in supplies or export the crude oil. Instead, it already had the waterways it needed to make transport easy from the start.

Other cities also competed to become the oil capital of Texas. Oil was discovered in other areas, and other cities noted their own gushers. Corsicana, Ranger, Borger, Odessa, and Kilgore all experienced brief booms that could have catapulted them to their own position within the industry.

It was Houston, however, that would ultimately win out.

The Texas Company Moves to Houston

In 1907, Jesse Jones went on a buying spree throughout the Houston area. He purchased the Bristol Hotel, a ten-story headquarters for the Houston Chronicle, and a ten-story skyscraper he built on spec. Ultimately, he offered the Texas Company — known today as Texaco — a brand new building for $2,000 a month. That was a major incentive to move their headquarters to the Houston area.

Joseph S. Cullinan, the owner of the Texas Company, couldn’t turn down the deal. “Houston seems to me to be the coming center of the oil business,” Cullinan noted in a letter to an associate.

He was right.

Once the Texas Company made the move, others would follow. Humble Oil, which eventually became Exxon, made the move shortly thereafter, followed quickly by a number of other oil companies.

1914: The Houston Ship Channel Opens

To truly become an industry giant, Houston needed a shipping option that would provide for easy transport of crude oil out and supplies in — and the city delivered. In 1914, the Houston Ship Channel opened, even though the port facilities were already adequate in the years leading up to it. The arrival of the ship channel made it easier to move those goods. This improvement catapulted Houston in being an ideal location for many types of business — including the oil business.

Houston’s Infrastructure

Many cities throughout Texas — and across much of America during those years — had the potential to produce massive amounts of oil. They even had the means to transport it. What they lacked, however, was the ability to effectively support the people that came along with those gushers.

In many oil towns, people lived in shacks or tents. They lacked sewage systems and running water, as well as access to adequate supplies. Even purchasing basic necessities was incredibly expensive due to a lack of ready availability. Thick, muddy water was the norm in some areas of the country, including Beaumont.

Houston, on the other hand, was ideally positioned to allow for the kind of growth necessary to support the large population that came in to handle oil gushers. The Allen brothers, who had founded the city, had always billed it as a future hub that would export some of the greatest wealth in Texas.

They couldn’t have known just how accurate that statement would be. Over the coming years, Houston would continue to grow as an oil giant, at least in part because it offered a number of advantages to people that couldn’t be found in other oil towns: reasonable housing, clean water, and ready access to the basic staples needed to support their lives.

Continuing Growth

Over the following years, Houston would continue to grow. The presence of crude oil flowing in mass quantities through the area made it the ideal hub for many oil, gas, and energy businesses. Houston’s flat land set it up for fast growth and made it easy to parcel out land and continue to grow local businesses. Investors and researchers followed the oilmen into the area, refining their techniques and tactics and learning more about what the area has to offer.

Where the investors are, the growth will follow. Innovation continued throughout the area, attracting a growing number of investors, scientists, and researchers. Likewise, that atmosphere of innovation brought along others interested in growing the energy sector. The same geographic features, including a growing infrastructure that can support the wide population, allows Houston to continue to support the large energy sector.

For a number of reasons, Houston is set to hold its position for some time to come.

What are those reasons?

1. Houston continues to diversify its economy.

This means that the city is unlikely to collapse under the boom and bust cycle of the energy industry. It has other industries that continue to provide support for its citizens. This simple diversity allows the city to continue to grow and its citizens to maintain their traditions and quality of life, even during difficult periods in the energy sector.

2. Houston remains a hub designed for easy travel.

Not only is water travel as easy as ever (sometimes not so much when there is excess), but it also has a major airport. That makes the city readily accessible for energy executives and investors from all over the world. It’s also equidistant between the west coast and the east coast of the United States, which makes it an ideal location for meetings between individuals across the country.

3. The biggest firms in the energy industry are already based in Houston.

These firms are well-entrenched, and their position continues to bring in others who are also interested in becoming big players in the energy scene. It has an incredible business climate geared toward growth, with plenty of opportunities for the biggest names in energy to connect.

4. Houston has grown to be at the forefront of the renewable energy sector, but…

Many industry giants are shifting away from crude oil and gas and adopting a focus on the energy transition. I have spoken to many leaders across the energy value chain that has either already jumped into investing in the energy transition or plans to follow soon. However, the allocation of capital towards the energy transition is going many other places and this is a threat to Houston’s energy leadership.

Houston’s Future

Houston remains one of the foremost players in the energy industry, not just across the United States, but across the world. However, we are at an amazing crossroads. What will Houston do?

Read more about how much Houston has changed since 2010 and please let me know what changes you think are going to rock Houston’s energy investment base next.