Dead in the Water: Whaling’s Collapse as a Blueprint for Fossil Fuel Valuation

Introduction

We start our story from a town in Massachusetts called New Bedford. These days, life is quiet there. The locals pass monuments dedicated to sailors who sacrificed themselves on voyages which lasted months.

But in 1840, New Bedford was one of the most powerful cities in North America – it was “the city that lit up the world.”

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While killing whales, sailors off New Bedford’s coast discovered that the blubber of sperm and right whales could be rendered into whale oil - a new source of fuel which produced a bright, odourless flame, providing heat.

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The commercial whaling industry exploded. Annual whale catches increased tenfold and New Bedford became one of the great American cities, connected to the world by its exports. At its height, New Bedford firms were selling whale oil to maintain 5,000 streetlamps in London.

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But soon, it all fell apart.

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Whale exports fell drastically and the factories fell into dereliction. We can see a dominant energy complex brought to its knees by forces that, in hindsight, were entirely visible. In this article, I will explore the key reasons for the whaling industry’s decline and ask: did the industrialists of the 19th century misprice whale oil in the face of kerosene’s arrival?

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A Whale of a Time: The Forces Behind the Collapse

Three structural forces destroyed the whaling industry.

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The first is resource depletion. As demand for whale oil grew, larger industrial ships captured more whales, accelerating the depletion of whale stocks. As populations declined, hunters were forced to sail further out to sea for longer periods, driving up costs and increasing the risk of failed voyages. In the analysis below, voyage duration serves as a proxy for whale stock depletion.

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The second force is price. Rising whale oil prices in the latter part of the 19th century are hypothesised to have depressed demand and, critically, to have been misread by investors.

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The third force is substitution. The drilling of Edwin Drake’s first commercial oil well at Titusville, Pennsylvania in 1859 marked the inflection point - kerosene rapidly displaced whale oil for lighting and heating, at lower cost. This article investigates whether capital markets saw it coming.

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Internal Fragility in the Industry

To test the significance of these forces, I constructed an OLS regression across 2,086 voyage records spanning 1840 to 1876, controlling for port and year fixed effects to isolate clean variation in voyage-level returns. The model takes the following form:

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Log Rᵢₜ = α + β₁VoyDurᵢₜ + β₂OilPriceₜ + β₃Keroₜ + β₄Tonnageᵢₜ + β₅SpermVoyageᵢₜ + Port FE + Year FE + εᵢₜ

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where Log Rᵢₜ is log voyage productivity - oil-equivalent barrels returned per month, serving as a proxy for capital returns - for voyage i in year t. VoyDurᵢₜ is voyage duration in months, OilPriceₜ is the weighted average whale oil price per barrel, Keroₜ is US petroleum production as a kerosene substitution proxy, and Tonnageᵢₜ and SpermVoyageᵢₜ are controls for vessel size and species mix respectively. Each coefficient represents the percentage change in voyage productivity associated with a one standard deviation increase in the relevant regressor.

   

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R² = 0.451, N = 2,086. * p<.1, ** p<.05, *** p<.01

 

Longer voyages predicted lower returns, confirming that resource depletion was structurally baked into the industry's economics. Higher whale oil prices also signalled lower returns - prices rose because whales were scarcer, not because business was booming. Strikingly, the positive petroleum coefficient suggests capital kept flowing into highly productive voyages even as competition from kerosene mounted, a trend that motivates the sub-period analysis below.

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The Smoking Gun: A Sub-Period Analysis

The sub-period analysis is the empirical heart of this investigation. By splitting the sample across three windows - pre-substitution (1840–1858), disruption onset (1859–1868), and terminal decline (1869–1876) - we can test whether capital markets were responding to the warning signals of collapse in real time.

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The kerosene coefficient across the three periods tells the story:

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​​​​Before commercial petroleum existed, voyage productivity was already negatively associated with depletion pressure, confirming that resource exhaustion was visible long before kerosene arrived.

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Between 1859 and 1868, US petroleum production surged after the Drake well. A rational investor should have withdrawn capital from whaling to avoid the kerosene threat. Instead, the kerosene coefficient is +0.032 - statistically indistinguishable from zero - showing capital kept flowing as if the substitute didn't exist. Compounding this, the whale oil price coefficient turns positive, suggesting investors misread rising prices as a signal of prosperity rather than resource scarcity. The market actively misinterpreted the substitution threat.

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By terminal decline (1869–1876), the reckoning had arrived. The duration coefficient nearly triples in magnitude, reflecting catastrophic whale population depletion, while the price coefficient collapses as scarcity pricing finally overwhelmed any remaining productivity premium. The market had finally priced the transition - but a decade too late.

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A Valuation Reconstruction

To translate these findings into valuation terms, I reconstruct the implied terminal value of a representative whaling firm at three historical snapshots using a simplified Gordon Growth Model, with median voyage productivity as the free cash flow proxy. A constant base case (r = 10%, g = +1%) is set against a period-specific bear case calibrated to the regression findings.

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​​At its peak in 1840, the gap between optimist and bear case was modest - a 19.8% haircut reflecting genuine uncertainty. By 1860, the rational haircut widened to 38.3%, representing the valuation cost of ignoring a kerosene signal that the sub-period regression shows markets were not pricing. By 1876, the bear case implies a 58.6% haircut - destruction of more than half of implied firm value that a rational analyst should have been applying years earlier.

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A rational investor in 1860, reading the kerosene data that was freely available and applying bear case assumptions, should have marked down the implied value of a whaling firm by more than a third. The sub-period regression shows that capital flows reflected none of this.

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What Can We Learn?

This investigation set out to answer a deceptively simple question: did 19th century capital markets see the collapse of the whaling industry coming? The evidence suggests they did not.

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The data reveals a consistent pattern of systematic mispricing. Resource depletion was statistically visible throughout the period - yet when kerosene arrived in 1859, capital allocation was completely unresponsive. Investors were simultaneously misreading rising whale oil prices as a prosperity signal rather than a resource scarcity distress signal.

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Translating these findings into valuation terms, a rational analyst in 1860 should have applied a 38% terminal value haircut - a figure that widens to 59% by 1876. Contemporary capital flows reflected neither. The whaling industry did not price its own destruction until the destruction was already complete.

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References:

1. American Offshore Whaling Voyages. 2026. Dataset. Hosted by Whaling History. https://whalinghistory.org/aowv/AmericanOffshoreWhalingVoyages.zip.

2. Demuth, Bathsheba. 2023. "Overview: Harvesting Light: New England Whaling in the Nineteenth Century." Energy History Online. Yale University. https://energyhistory.yale.edu/harvesting-light-new-england-whaling-in-the-nineteenth-century/.

3. Nantucket Historical Association. n.d. "Why Did Nantucketers Stop Whaling?" Nantucket History Topics. https://nha.org/research/nantucket-history/history-topics/why-did-nantucketers-stop-whaling/.

4. Our World in Data. n.d. "Global Energy Data." GitHub repository. https://raw.githubusercontent.com/owid/energy-data/master/owid-energy-data.csv.

5. Pearce, David, and Vital Schneider. 2004. "What Saved the Whales? An Economic Analysis of 20th Century Whaling." Biodiversity & Conservation 13 (3): 543–62. https://doi.org/10.1023/B:BIOC.0000009494.63056.ea.

6. Science and Media Museum. 2022. "The History of Whaling and Its Objects." Objects and Stories. https://www.scienceandmediamuseum.org.uk/objects-and-stories/history-whaling.

7. Michael Bockisch. 1998. "Chapter 3: Animal Fats and Oils." In Fats and Oils Handbook, PII: B9780981893600500081. https://www.sciencedirect.com/science/chapter/edited-volume/pii/B9780981893600500081.

8. Starbuck, Alexander. 1878. History of the American Whale Fishery from Its Earliest Inception to the Year 1876. Waltham, MA: Published by the Author. Digitized by Internet Archive. https://archive.org/details/historyofamerica00star.

9. Thornton, Stuart, and Meghan E. Marrero. 2023. "Big Fish: A History of Whaling." National Geographic Education. https://education.nationalgeographic.org/resource/big-fish-history-whaling/.

10. The Guardian. 2023. "The First Great Energy Transition: How Humanity Gave Up Whaling." The Guardian, March 11, 2023. https://www.theguardian.com/environment/2023/mar/11/the-first-great-energy-transition-how-humanity-gave-up-whaling