JEST Shortly before the Civil War, Rockefeller and a partner established a shipping company in Cleveland, Ohio. The company made much money during the war. In 1863, he and his partner invested in another business that refined crude oil from Pennsylvania into kerosene for illuminating lamps. By 1870, Rockefeller and new partners were operating two oil refineries in Cleveland, then the major oil refining center of the country. The partners incorporated (under a charter issued by the state of Ohio) and called their business the Standard Oil Company.
To give Standard Oil an edge over its competitors, Rockefeller secretly arranged for discounted shipping rates from railroads. The railroads carried crude oil to Standard’s refineries in Cleveland and kerosene to the big city markets. Many argued that as “common carriers” railroads should not discriminate in their shipping charges. But small businesses and farmers were often forced to pay higher rates than big shippers like Standard Oil. The oil industry in the late 1800s often experienced sudden booms and busts, which led to wildly fluctuating prices and price wars among the refiners.
More than anything else, Rockefeller wanted to control the unpredictable oil market to make his profits more dependable. In 1871, Rockefeller helped form a secret alliance of railroads and refiners. They planned to control freight rates and oil prices by cooperating with one another. The deal collapsed when the railroads backed out. But before this happened, Rockefeller used the threat of this deal to intimidate more than 20 Cleveland refiners to sell out to Standard Oil at bargain prices. When the so-called “Cleveland Massacre” ended in March 1872, Standard controlled 25 percent of the U.
S. oil industry. Rockefeller saw Standard Oil’s takeover of the Cleveland refiners as inevitable. He said it illustrated “the battle of the new idea of cooperation against competition. ” In his mind, large industrial combinations, more commonly known as monopolies, would replace individualism and competition in business. Rockefeller planned to buy out as many other oil refineries as he could. To do this, he often used hardball tactics. In 1874, Standard started acquiring new oil pipeline networks.
This enabled the company to cut off the flow of crude oil to refineries Rockefeller wanted to buy. When a rival company attempted to build a competing pipeline across Pennsylvania, Standard Oil bought up land along the way to block it. Rockefeller also resorted to outright bribery of Pennsylvania legislators. In the end, Rockefeller made a deal with the other company, which gave Standard Oil ownership of nearly all the oil pipelines in the nation. By 1880, Standard Oil owned or controlled 90 percent of the U. S. oil refining business, making it the first great industrial monopoly in the world.
But in achieving this position, Standard violated its Ohio charter, which prohibited the company from doing business outside the state. Rockefeller and his associates decided to move Standard Oil from Cleveland to New York City and to form a new type of business organization called a “trust. ” Under the new arrangement (done in secret), nine men, including Rockefeller, held “in trust” stock in Standard Oil of Ohio and 40 other companies that it wholly or partly owned. The trustees directed the management of the entire enterprise and distributed dividends (profits) to all stockholders.
When the Standard Oil Trust was formed in 1882, it produced most of the world’s lamp kerosene, owned 4,000 miles of pipelines, and employed 100,000 workers. Rockefeller often paid above-average wages to his employees, but he strongly opposed any attempt by them to join labor unions. Rockefeller himself owned one-third of Standard Oil’s stock, worth about $20 million. During the 1880s, Standard Oil divided the United States into 11 districts for selling kerosene and other oil products. To stimulate demand, the company sold or even gave away cheap lamps and stoves.
It also created phony companies that appeared to compete with Standard Oil, their real owner. When independent companies tried to compete, Standard Oil quickly cut prices–sometimes below cost–to drive them out of business. Then Standard raised prices to recoup its losses. The benefits of having a monopoly like Standard Oil in the country was only realized after it had built a nationwide infrastructure that no longer depended on trains and their notoriously fluctuating costs, a leap that would help reduce costs and the overall price of petroleum products after the company was dismantled.
The size of Standard Oil allowed it to undertake projects that disparate companies could never agree on and, in that sense, it was as beneficial as state-regulated utilities for developing the U. S. into an industrial nation Economies of Scale As small companies compete, you naturally get market leaders. As these companies get larger they become more efficient at producing goods and services. They invest in mass production techniques in order to produce goods more cheaply than their competitors. They buy raw materials at cheaper prices because they buy in bulk.
They expand specialization amongst their workforce. They also copyright and patent their work, preventing rivals from using it. This is known as economies of scale. The bigger you get, the easier it is to make money. Smaller companies cannot compete. This is called a barrier-to-entry. If you wanted to compete with Ford motor cars, for example, just one car plant would set you back around $500 million. Predators John D Rockefeller began as a humble oil business book-keeper in Cleveland, Ohio and in just seven years rose to control a tenth of the entire US oil business.
In the late 19th century the oil industry was a free-for-all, the law of the jungle ruled. Rockefeller used this ‘individual freedom’ to pursue several extremely successful and deceitful tactics to accumulate capital. He would secretly buy up or create new oil related companies such as engineering and pipeline firms. These seemed to be independent operators. Rockefeller and his close colleagues secretly controlled the firms and gave Standard Oil, Rockefeller’s main oil company, hidden rebates.
Another tactic was to buy up a competing oil company, again secretly. Officials from this company could then be used very effectively to spy on, and give advanced warning of, deals being hatched by his real competitors. Almost certainly the most lucrative secret deals done by Rockefeller and his partners were with the railroads. These ‘in harmony’ deals meant those refineries and oil traders not ‘in harmony’ with standard would find that railroads would refuse point blank to move their oil, whatever the price.
Oil, of course, is free at source, so once the investment in refining and extraction plant has been made the only really important cost was transportation. Rockefeller’s secret railroad rebates on the transportation of his oil kept his competitors guessing for years. None of them could understand how he kept pump prices so low. They were all bemused that Standard Oil had being growing at such a rate. How he managed to persuade the railroads to give him rebates and keep the deals secret is still not clear.
