Prior to the 1881 completion of the Texas & Pacific Railway through Pyote, a telegraph office was operated by the company called 'Pyote Tank.' The name is thought to have derived either from the way Chinese rail workers pronounced "coyote," or from the peyote cactus that grows in the area. The large 7S Ranch was established just south of town by J.A. Stewart in 1885. In 1907, a post office opened in Pyote with Albert D. Pigman as postmaster. That same year, Cicero S. Sutton opened a store and a one-room school was built.

By 1925, Pyote had 100 residents. In 1926, oil was discovered nearby in Winkler County and Pyote quickly grew as a trading and shipping center for the area. By 1928, Pyote was home to nearly 3500 and several businesses. That same year, a new $100,000 brick school opened.

This prosperity was short lived, however. In 1930, a spur line from Monahans was completed to the oil fields, effectively bypassing Pyote. By 1931, only few more than 1000 remained. Nevertheless, the town was incorporated in 1933 and managed to hold on to its population until 1939. By 1941, however, the population dropped to 201.

In 1942, the Pyote Army Air Field was built to train B-17 crews. It was nicknamed the "Rattlesnake Bomber Base" due to the number of rattlesnake dens found during its construction. Within four months, the base had become the largest bomber installment in the country. By late 1944, the base housed 6,500, and training switched to the B-29. After World War II, the base, now called the Pyote Air Force Base, became an aircraft storage location. One of the most notable planes to be kept at Pyote was the Enola Gay, which dropped the atomic bomb on Hiroshima. In its later days, Pyote was also utilized to scrap planes. In 1963, the base was deactivated. The remaining base housing and Air Defense Command buildings later housed the West Texas Children's Home from 1966-2010.