But even such a primitive kerosene production “process” was very often violated. Once factory owners understood the flaws of excise taxation, oil distillation was accelerated in an attempt to outperform the excise tax standard and thus remain profitable, but in so doing an even lower quality of kerosene was produced. Owners contrived to carry out four to 10 cycles per day. Under forced distillation, vats often overheated, so that heavy fractions were distilled while the light ones could not be captured in the condenser and escaped into the air. Frequent explosions and fires also resulted, from which the workers suffered the most, and corruption among excise tax bureaucrats was rampant. Ultimately, the Russian oil industry was driven into a corner, and the flawed kerosene excise tax became a quagmire preventing its further development.
At the suggestion of Actual State Councilor Staroselsky, the governor of Baku, people working in the oil industry elected a committee to prepare specific proposals for overcoming the industry’s stagnation. As a result, the committee pointed out that one of the key reasons for the crisis was the unequal distribution of excise tax among refiners, noting in particular that the existing system made any technical improvements in refining equipment impossible and reduced kerosene production. The committee’s main conclusion was that the excise tax on produced kerosene had to be eliminated for the industry to develop.
In turn, the Imperial Russian Technical Society (IRTS) took up this most important cause. On January 21, 1876, the IRTS established a committee “On the Oil Excise Tax and Development of the Oil Industry” under the chairmanship of Prince Nikolay Romanovsky, honorary chairman of the IRTS. This committee, which included prominent Russian scientists and industrialists, contributed significantly to the development of the domestic oil business. At the committee’s February 11, 1876 meeting, during a discussion of the report by IRTS secretary Fëdor Lvov, Baku Oil Company founder Vasily Kokorev declared: “The liberation of the oil industry from the excise tax and from any constraint connected with it is a step that could really promote its development and one to which the oil industry has a right.”39 Then he stated his profound views regarding the need for complete refining of oil and its residues: “The oil question is an issue of state importance: in addition to photogen used for lighting, oil provides lubricants and dense, so-called residual oil. An enormous fortune’s worth of lubricants are now being imported from abroad, whereas our manufacture of them should be an extension of photogen production, utilizing everything that can be recovered from the primary material—that is, crude oil—and it would be completely unjust to impose an excise tax on this byproduct.”
In May 1876, the IRTS board sent Professor Dmitry Mendeleyev of St. Petersburg University on a trip to the International Exhibition of Arts, Manufactures and Products of the Soil and Mines in Philadelphia with the specific task of studying the state of affairs in the American oil industry, including finances, and of objectively determining once more the cause of the oil business crisis in Russia. Konon Lisenko, a professor from the Mining Institute, was likewise sent to the Absheron Peninsula for an onsite study of the “grave consequences of the oil excise tax.”
Professor Lisenko observed that Baku refiners saddled with the excise tax were unconcerned with either improving oil distillation units or developing other valuable petroleum products on a par with kerosene (e.g., asphalt made of kir). He came to the firm conclusion that the photogen excise tax in the form that it was imposed by the February 1, 1872 regulations was a millstone around the neck of the nascent oil industry.
In his turn, Professor Mendeleyev in the United States focused particularly on the taxation system in the American oil industry. An excise tax had also been introduced there from 1862 through 1869, both on crude oil and petroleum products. This was done to cover some of the colossal expenses of the American Civil War. The oil excise tax did provide the US government with an impressive total of $9,000,000 per year, but despite that the country’s leadership abolished the excise tax first on exported kerosene, and then on all petroleum products. Moreover, the government began to protect the export of kerosene by returning the customs duties collected on the tin cans in which the kerosene was exported abroad and not collecting customs duties on iron cans (barrels) that were reimported to the United States. The oil excise tax was totally repealed in 1868, during the Reconstruction period.
After returning from America, Mendeleyev compiled a detailed report on his business trip in the form of a corresponding memorandum, which he laid on the desk of Finance Minister Mikhail Reytern. Then, on December 18, 1876, he gave a detailed report at the general meeting of the Imperial Russian Technical Society.
On the whole, both scientists handled their tasks brilliantly, and their books—D. I. Mendeleyev’s The Oil Industry in the American State of Pennsylvania and in the Caucasus [Neftyanaya promyshlennost v Severo-Amerikanskom shtate Pensilvaniya i na Kavkaze] and K. I. Lisenko’s Oil Production [Neftyanoye proizvodstvo]—provided convincing arguments for repealing the excise tax.
The IRTS committee concluded that the most important way to help the Russian oil industry would be to “liberate it from any excise tax for at least 10 years.” The Russian government understood this constructive viewpoint and based on the decision of the State Council dated June 6, 1877, which was approved by Emperor Alexander III on the same day, photogen products were exempted from excise and other taxes throughout the Russian Empire effective September 1, 1877.
This meant first of all, a victory for progressive public opinion in the battle against the fetters of excise taxation, and second—and this was more important—freedom for the oil industry from any taxes that would otherwise prevent it from growing stronger and moving forward along the path of free enterprise and fair market competition.
The Russian Oil Business Becomes Competitive
The repeal of the Russian excise tax on photogen (kerosene) production provided a powerful impetus to oil production across all key sectors. While oil production did increase during the five-year period of the excise tax, the accelerated development of the Russian oil industry began in earnest in 1877, with advancements in methods of oil production, transportation, refining and marketing.
Production and technical indicators also show significant progress in the Russian oil industry. The average depth of Baku oil wells doubled from 1878 through 1886, from 301 to 609 feet, with wells being drilled to depths up to 1,120 feet. Another telling sign of the industry’s growth was the eight-fold increase in the variety of petroleum products available on the market.
Table 3. Russian Oil Production, 1878–1888 (in barrels and tons)
Source: Stanislav and Ludwig Perschke, The Russian Oil Industry, Its Development and Current Status in Statistical Data [Russkaya neftyanaya promyshlennost, yeyë razvitiye i sovremennoye polozheniye v statisticheskikh dannykh]. Tiflis (Tbilisi), 1913, pp. 4, 5.
During the excise-free decade, the selling price of domestic kerosene dropped nearly 80%. The price of kerosene on the Tsaritsyn market (which was used to equalize prices elsewhere on the domestic Russian market) was 2.25 rubles per 36 pounds in 1877, dropping to 56 kopecks per 36 pounds in 1885 and 40 kopecks per 36 pounds in 1886. The reduction in the price of kerosene and its distribution throughout virtually all of Russia made it accessible to even the poorest families, who were able to replace the traditional kindling wood with convenient kerosene lamps.