Question

Whaling was a major industry around the world in the early to mid 1800s. Whale oil was used for lighting in homes. Over the late 1800s, the quantity of whale oil bought and sold on world markets decreased dramatically. Exactly why is a matter of some dispute, depending on who you ask about it.

A. Thinking simply about supply and demand graphs, how would you determine whether the decline in the quantity of whaling was a result of demand side or supply side reasons?

B. Why might there have been a decline in the demand for whale oil?

C. Why might there have been a decline in the supply of whale oil?

D. Might this be analogous to the market for petroleum today?

Answer 1

Whaling referred to the old practice of hunting whales for their meat, blubber and primarily for their oil. The use of whale oil peaked till the mid 1800s. Boasting of multiple uses like lighting lamps, making soaps, and even lubricating heavier machinery, the whale oil industry became increasingly competitive by the 18^th and 19^th century, though its use had started centuries ago. If we take a closer look, then the time period of the Industrial Revolution coincided with the time frame when whale oil was booming. Whale oil also fuelled the initial phases of the Industrial Revolution. However, during the late 1800s, this whale oil industry had a sharp decline. There were various reasons for it, which were not only a result of the market forces that came into play, but also several social and political forces that were at work.

1. There have been very complicated debates on why whale oil almost disappeared. As is mentioned in the question, exactly why the whale industry fell was a matter of dispute, depending on who the question was raised to. However, eliminating the complexities, if simply focussed on basics of the market forces of demand and supply it is visible from Figure 1 that a drop in quantity of whale oil was a possibility of a leftward shift or the demand curve. Similarly, a drop a drop in quantity of whale oil was also a possibility of a leftward shift in the supply curve, as shown in Figure 2. While the impact of shift of these two forces can be viewed separately, the reality is that a fall in the whale oil industry was a result of a combination of both the demand and supply. When there is a change in demand, there will be an adjusting effect on supply. It can be identified as to which force- whether demand or supply- initiated the decline, but no single force can be isolated and blamed for the overall fall of the whale oil market. This interaction and joint fall of demand and supply is shown in figure 3. Thus, both the determinants of demand and supply were affected which resulted in a leftward shift of both the curves, specifically the demand curve from D to D’ and the supply curve from S to S’, thereby dropping Quantity from Q to Q’.
2. On the demand front, there might have been quite a few reasons at play for the decline of whale oil.

Firstly, by 1850s to 1860s, the consumers were served with alternatives of whale oil. There was Camphene, Lard oil, Coal oil and Kerosene oil from petroleum. If we look at the determinant which deals with ‘Prices of related goods’, then, the above mentioned alternatives became cheaper substitutes of whale oil. Whale oil was by far the most expensive, priced at about $1.30 to $2.50 per gallon, depending on the quality of whale oil chosen. As opposed to that, Camphene was priced at about 50cents a gallon and the highest among the alternatives was lard oil, still priced lower than 1 gallon of whale oil. It made sense for consumers to switch to less costly alternatives.

Secondly, the population of humans were increasing at a much higher rate than the population of whales. As compared to the exponentially increasing demand for whale oil, supply was not being able to match up. Industrial Revolution further acted as a catalyst in spurring the demand for whale oil. As demand continued to rise, the price of whale oil continued to soar. If we take into account the determinant of ‘own price of a commodity’, an increase in price, other things remaining constant would mean a fall in demand. The soaring prices made it difficult for many to afford whale oil for large scale use, as they started searching for cheaper and close substitutes. Thus, the whale oil was slowly being driven out by younger, newer oils in the market.

Thirdly, from a more humanitarian point of view, whale oil was obtained from killing huge number of whales. As opposed to this practice, the alternative sources like coal oil, camphene, were being made available to consumers without killing any animals. If we look at the determinant of ‘Tastes and Preferences of a consumer’, then many preferred the non-violent way of satisfying their needs. Thus the demand for whale oil fell.

While all these factors are important, these would not have been possible had there not been any alternatives for whale oil. In that case, no matter how costly or violent, consumers would be left with no choice but to consume whale oil. Thus, it is safe to say that introduction of alternative fuels played the key role in eating up the whale industry.

3. Just like the demand side, determinants from the supply side were also affected which bolted doors to the whale industry.

Firstly, the most important factor affecting supply was the dearth in the population of whales. So many whales were killed for centuries that they were driven almost to the point of extinction. Supply was dramatically low following the concerns of such a reduced whale population.

Secondly, since whales were not being easily available, fishermen had to move father into the sea. They needed better equipment to catch the remaining whales whale also experienced an increase in time required to come back to shore with a good number of whales. Since whale are the inputs for whale oil, the determinant of ‘Input Prices’ shot up. Though not directly, but indirectly, in the form of more effort and time. This drove up the cost of production of whale oil which could not be recovered by an increase in the selling price (because consumers preferred the alternatives) and adversely affected supply.

Thirdly, the determinant of ‘price of related goods’ also played an important role here. Sellers found it to produce and sell the cheaper alternatives which were more in demand in the oil market. Thus, very few sellers were left with the old and expensive whale oil.

Lastly, the factor of ‘nature of the commodity’ also had a huge role to play. Whale oil no was on longer a monopoly. In fact, various substitutes made the whale industry increasingly competitive. Prices had to be driven down to compete with cheaper alternatives, which made the profit margin of whale oil sellers go south. Eventually, it came to a point where it became unprofitable to produce and sell whale oil, and the whale industry reached its shut down point.

4. Petroleum is found beneath the surface of the earth which is refined into various fuels. Just like the Whale Oil industry had flourished till the late 1800s, the petroleum industry has been basking in its glory for quite a few decades now. However, we must remember that fossil fuels such as petroleum are scarce in nature. With continuous depletion, the non-renewable source of energy is feared to become extinct in the near future.

Additionally, the burning of fossil fuels plays a big role in contributing to global warming. Its use also has a series of negative impacts on the environment which include acidifying the ocean, oil spills at sea that kill various aquatic creatures, formation of tar balls, etc. Owing to these factors, the search for cheaper and environment-friendly oils is on in full swing. Natural gas, biodiesel etc are already replacing petroleum in the vehicle industry. Renewable energy sources like hydroelectricity, solar energy etc are being tapped for electricity purposes. The picture in progress makes the petroleum industry act as an analogy to the whale oil industry, where probably more environment-friendly resources will replace petroleum for good. However, due to some new and better methods of drilling petroleum and a lot of pending work on improving the efficiency of alternative fuels, it’ll be long before this day makes a mark where petroleum finally bids farewell to the fuel market.