Standard Oil

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Standard Oil (1870–1911) was a large, integrated, oil producing, transporting, refining, and marketing company.

Standard Oil Refinery No. 1 in Cleveland, Ohio, 1899
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Standard Oil Refinery No. 1 in Cleveland, Ohio, 1899

Standard Oil began as an Ohio partnership formed by the well-known industrialist John D. Rockefeller, his brother William Rockefeller, Henry Flagler, chemist Samuel Andrews, and a silent partner Stephen V. Harkness. Using highly effective and widely criticized tactics, Standard Oil absorbed or destroyed most of its competition in Cleveland, Ohio, then throughout the northeastern United States, putting numerous small corporations out of business.

In response to state laws attempting to limit the scale of companies, Rockefeller and his partners had to develop innovative ways of organizing so that they could effectively manage their increasingly giant enterprise. In 1882, they combined their disparate companies, spread across dozens of states, under a single group of trustees. This organization proved so successful that other giant enterprises adopted this "trust" form. At the same time, state and federal laws sought to counter this development with "antitrust" laws. Ohio successfully sued Standard Oil, compelling the dissolution of the trust in 1892. Standard Oil fought this decree, in essence separating off only Standard Oil of Ohio without relinquishing control of that company. Eventually, New Jersey changed its incorporation laws to allow a single company to hold shares in other companies in any state. Thus, in 1899, the Standard Oil Trust was legally reborn as a holding company -- a corporation known as the Standard Oil Company of New Jersey.

Eventually, the U.S. Justice Department sued Standard Oil of New Jersey under the federal anti-trust law, the Sherman Antitrust Act of 1890. In 1911, the Supreme Court upheld the lower court judgment, and forced Standard Oil to separate into 34 companies, each with its own distinct board of directors. Standard's president, John D. Rockefeller had, by then, long since retired from any management role and became simply a shareholder in each of the new companies. They formed the core of today's U.S. oil industry, including ExxonMobil (formerly Standard of New Jersey and Standard of New York), ConocoPhillips (the Conoco side, which was Standard's company in the Rocky Mountain states), Chevron (Standard of California), Amoco and Sohio (Standard of Indiana and Standard of Ohio, respectively, now BP of North America), Atlantic Richfield (the Atlantic side, now also a part of BP North America), Marathon (covering western Ohio and other parts of Ohio not covered by Sohio) and many other smaller companies.


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[edit] Business strategy of Standard Oil

Standard Oil's market position had been established through an emphasis on efficiency and responsibility. While most companies dumped gasoline (this being before the automobile) in rivers, Standard used it to fuel the company's own machines. Where gigantic mountains of heavy waste grew by other companies' refineries, Rockefeller found ways to market and sell these waste products, creating the synthetic first competitor for beeswax, as well as acquiring the company that invented and produced Vaseline, the Chesebrough Manufacturing Company, which was a Standard company only from 1908 until 1911.

As the company grew larger through more effective business practices, it developed other strongly competitive (some say anti-competitive) strategies, including a systematic program of offering to purchase competitors. Many business owners rejected the offer, but many accepted it. After purchasing them, Rockefeller shut down the ones he believed to be inefficient while keeping the others. In a seminal deal, in 1868, the Lake Shore Railroad, a part of the New York Central, gave Rockefeller's firm a 25 cents/bbl. (71%) discount off of its listed rates in return for a promise to ship at least 60 carloads of oil daily and to handle the loading and unloading on its own, a huge competitive advantage. Smaller companies decried the deals as being unfair because they were not producing enough oil to qualify for discounts. In 1872, Rockefeller joined the South Improvement Company which would have allowed him to receive rebates for shipping oil but also to receive drawbacks on oil his competitors shipped. When word got out of this arrangement, competitors convinced the Pennsylvania Legislature to revoke South Improvement's charter. No oil was ever shipped under this arrangement.

In one example of Standard's aggressive practices, a rival oil association decided to build an oil pipeline, hoping to overcome the virtual boycott imposed on Standard's competitors. In response, the railroad company (at Rockefeller's direction) denied the consortium permission to run the pipeline across railway land, forcing consortium staff to laboriously decant the oil into barrels, carry them over the railway crossing in carts, and then pump the oil manually back into the pipeline on the other side. When he learned of this tactic, Rockefeller then instructed the railway company to park empty rail cars across the line, thereby preventing the carts from crossing his property.

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Standard's actions and secret transport deals helped its kerosene to drop in price from 58 to 26 cents between 1865 and 1870. Competitors might not have appreciated the company's business practices, but consumers appreciated the drop in prices. Standard Oil, being formed well before the discovery of the Spindletop oil field and a demand for oil other than for heat and light, was well placed to control the growth of the oil business. The company was perceived to own and control all aspects of the trade. Oil could not leave the oil field unless Standard Oil agreed to move it: the "posted price" for oil was the price that Standard Oil agents printed on flyers that were nailed to posts in oil producing areas, and producers were in a take-it-or-leave-it position.

In 1890, Standard Oil of Ohio moved its headquarters out of Cleveland and into its permanent headquarters at 26 Broadway in New York City. Concurrently, the trustees of Standard Oil of Ohio chartered the Standard Oil Company of New Jersey in order to take advantages of New Jersey's more lenient corporate stock ownership laws. Standard Oil of New Jersey eventually became one of many important companies that dominated key markets, such as steel and the railroad. Also in 1890, Congress passed the Sherman Antitrust Act -- the source of all American anti-monopoly laws. The law forbade every contract, scheme, deal, or conspiracy to restrain trade, though the phrase "restrain trade" remains open to interpretation. The Standard Oil group quickly attracted attention from antitrust authorities leading to a lawsuit filed by then Ohio Attorney General David K. Watson.

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Then came Ida M. Tarbell, an American author and journalist, and one of the original "muckrakers". Her father was an oil producer whose business had failed due to Rockefeller's business dealings. Following extensive interviews with a sympathetic senior executive of Standard Oil, Henry H. Rogers, Tarbell's investigations of Standard Oil fueled growing public attacks on Standard Oil and on monopolies in general. Her work was first published in nineteen parts in McClure's magazine, from November 1902 to October 1904, in which year it was published in book form as The History of the Standard Oil Company.

Standard paid out in dividends during 1882 to 1906 in the amount of $548,436,000. A large part of the profits was not distributed to stockholders, but was put back into the business. The total net earnings from 1882-1906 amounted to $838,783,800, exceeding the dividends by $290,347,000. The latter amount was used for plant expansion. Rockefeller and his co-owners reinvested most of the dividends in other industries, especially railroads. They also invested heavily in the gas and the electric lighting business (including the giant Consolidated Gas Company of New York City). They made large purchases of stock in US Steel, Amalgamated Copper, and even Corn Products Refining Company. [1]

[edit] Monopoly charges, anti-trust litigation, and breakup of the Standard Oil group

By 1890, Standard Oil controlled 88% of the refined oil flows in the United States. In 1904 when the lawsuit began it controlled 91% of production and 85% of final sales. Most of its output was kerosene, of which 55% was exported around the world. In terms of cost efficiency, Standard's plants were about the same as competitors. After 1900 it did not try to force competitors out of business by underpricing them. [2] Beyond question, the federal Commissioner of Corporations concluded, the dominant position in the refining industry was due "to unfair practices-to abuse of the control of pipe-lines, to railroad discriminations, and to unfair methods of competition." [3] Gradually, its market share fell to 64% by 1911. Standard did not try to monopolize the exploration and pumping of oil (its share in 1911 was 11%). John D. Rockefeller in 1897 had completely retired from the Standard Oil Company of New Jersey, though he continued to own a large fraction of its shares.

As the public became more aware of the Standard Oil group in allowing its oil companies in different states to be headed by the same board of directors, there was more public support in calling for its dissolution.

In 1909, the U.S. Department of Justice filed suit in federal court alleging that Standard had engaged in the following methods to continue the monopoly and restrain interstate commerce: [4]

"Rebates, preferences, and other discriminatory practices in favor of the combination by railroad companies; restraint and monopolization by control of pipe lines, and unfair practices against competing pipe lines; contracts with competitors in restraint of trade; unfair methods of competition, such as local price cutting at the points where necessary to suppress competition; [and] espionage of the business of competitors, the operation of bogus independent companies, and payment of rebates on oil, with the like intent."

The lawsuit further argued that Standard's monopolistic practices took place in the last four years: [5]

"The general result of the investigation has been to disclose the existence of numerous and flagrant discriminations by the railroads in behalf of the Standard Oil Company and its affiliated corporations. With comparatively few exceptions, mainly of other large concerns in California, the Standard has been the sole beneficiary of such discriminations. In almost every section of the country that company has been found to enjoy some unfair advantages over its competitors, and some of these discriminations affect enormous areas."

The government identified four illegal patterns: 1) secret and semi-secret railroad rates; (2) discriminations in the open arrangement of rates; (3) discriminations in classification and rules of shipment; (4) discriminations in the treatment of private tank cars. The government alleged: [6]

"Almost everywhere the rates from the shipping points used exclusively, or almost exclusively, by the Standard are relatively lower than the rates from the shipping points of its competitors. Rates have been made low to let the Standard into markets, or they have been made high to keep its competitors out of markets. Trifling differences in distances are made an excuse for large differences in rates favorable to the Standard Oil Company, while large differences in distances are ignored where they are against the Standard. Sometimes connecting roads prorate on oil--that is, make through rates which are lower than the combination of local rates; sometimes they refuse to prorate; but in either case the result of their policy is to favor the Standard Oil Company. Different methods are used in different places and under different conditions, but the net result is that from Maine to California the general arrangement of open rates on petroleum oil is such as to give the Standard an unreasonable advantage over its competitors

The government said that Standard raised prices to its monopolistic customers, but lowered them to hurt competitors, often disguising its illegal actions by using bogus supposedly "independent" companies it controlled. [7]

"The evidence is, in fact, absolutely conclusive that the Standard Oil Company charges altogether excessive prices where it meets no competition, and particularly where there is little likelihood of competitors entering the field, and that, on the other hand, where competition is active, it frequently cuts prices to a point which leaves even the Standard little or no profit, and which more often leaves no profit to the competitor, whose costs are ordinarily somewhat higher."

On May 15, 1911, the United States Supreme Court ordered the breakup of the Standard Oil group of companies into thirty-four independent companies, each with its own board of directors.[8] The Court declared the group to be an "unreasonable" monopoly under the Sherman Antitrust Act.

[edit] Legacy

Whether the existence of Standard Oil was beneficial is a matter of some controversy.[9]

The notion that Standard was a monopoly is rejected by some economists, citing its much reduced market presence by the time of the antitrust trial. In 1890, Rep. William Mason arguing in favor of the Sherman Antitrust Act, said "trusts have made products cheaper, have reduced prices; but if the price of oil, for instance, were reduced to one cent a barrel, it would not right the wrong done to people of this country by the trusts which have destroyed legitimate competition and driven honest men from legitimate business enterprise". [10] However, those who oppose antitrust tend not to support competition as an end in itself but rather as being justified by its results --low prices. As long as a monopoly is not a coercive monopoly where a firm is securely insulated from potential competition, it is argued that theoretically a monopoly must keep prices low in order to discourage competition from arising. Hence, they believe legal action is uncalled for, and harms the firm and consumers. This line of thought has never been enacted into law. The Courts, however, decided Standard was indeed a coercive monopoly. The Sherman Act remains the law in 2006.

Some analysts agree that the breakup was beneficial to consumers in the long run, and no one has ever proposed that Standard Oil be reassembled in pre-1911 form.[11]

[edit] Successors

Successor companies to Standard Oil include:

See also Seven Sisters (oil companies)

Other Standard Oils:

  • Standard Oil of Iowa - pre 1911 - became Standard Oil of California
  • Standard Oil of Minnesota - pre 1911 - bought by Standard Oil of Indiana
  • Standard Oil of Illinois - pre 1911 - bought by Standard Oil of Indiana
  • Standard Oil of Kansas - refining only, eventually bought by Indiana Standard
  • Standard Oil of Missouri - pre 1911 - dissolved
  • Standard Oil of Louisiana - always owned by Standard Oil of New Jersey (now Exxon)
  • Standard Oil of Brazil - always owned by Standard Oil of New Jersey (now Exxon)
  • Standard Oil of Colorado - a scam to cash in on the Standard Oil brand in the 1930s
  • Standard Oil of Connecticut - A fuel oil marketer in Connecticut not related to the Rockefeller companies

Other companies divested in the 1911 breakup:

  • Anglo-American Oil Co. - acquired by Jersey Standard in 1930, now Esso UK
  • Buckeye Pipeline Co.
  • Borne-Scrymser Co. (chemicals)
  • Chesebrough Manufacturing (Vasoline)
  • Colonial Oil
  • Crescent Pipeline Co.
  • Cumberland Pipe Line Co.
  • Eureka Pipe Line Co.
  • Galena-Signal Oil Co.
  • Indiana Pipe Line Co.
  • National Transit Co.
  • New York Transit Co.
  • Northern Pipe Line Co.
  • Prairie Oil & Gas
  • Solar Refining
  • Southern Pipe Line Co.
  • South Penn Oil Co. - eventually became Pennzoil, now part of Shell
  • Southwest Pennsylvania Pipe Line Co.
  • Swan and Finch
  • Union Tank Lines
  • Washington Oil Co.
  • Waters-Pierce

[edit] See also

[edit] Further reading

  • Chernow, Ron. Titan: The Life of John D. Rockefeller, Sr. London: Warner Books, 1998.
  • Folsom Jr., Burton W. John D. Rockefeller and the Oil Industry from The Myth of the Robber Barons. Young America, 2003.
  • Hidy, Ralph W. and Muriel E. Hidy. Pioneering in Big Business, 1882-1911: History of Standard Oil Company (New Jersey), 1955.
  • Jones; Eliot. The Trust Problem in the United States 1922. Chapter 5
  • Knowlton, Evelyn H. and George S. Gibb. History of Standard Oil Company: Resurgent Years 1911-1927, 1956.
  • Latham, Earl ed. John D. Rockefeller: Robber Baron or Industrial Statesman?, 1949. Primary and secondary sources.
  • Manns, Leslie D. "Dominance in the Oil Industry: Standard Oil from 1865 to 1911" in David I. Rosenbaum ed, Market Dominance: How Firms Gain, Hold, or Lose it and the Impact on Economic Performance. Praeger, 1998.
  • Nevins, Allan. John D. Rockefeller: The Heroic Age of American Enterprise. 2 vols. New York: Charles Scribner's Sons, 1940.
  • Nevins, Allan. Study In Power: John D. Rockefeller, Industrialist and Philanthropist. 2 vols. New York: Charles Scribner's Sons, 1953.
  • {{cite book | author=Nowell, Gregory P. | title=Mercantile States and the World Oil Cartel, 1900-1939. Cornell University Press, 1994.
  • Tarbell, Ida M. The History of the Standard Oil Company, 1904. The famous original expose in McClure's Magazine of Standard Oil.
  • Williamson, Harold F. and Arnold R. Daum. The American Petroleum Industry: The Age of Illumination, 1859-1899, 1959: vol 2, American Petroleum Industry: the Age of Energy 1899-1959, 1964. The standard history of the oil industry.
  • Droz, R.V. (2004). Whatever Happened to Standard Oil?. Retrieved June 25, 2005.
  • Standard Oil Company of California (1980). Whatever happened to Standard Oil?. Retrieved June 25, 2005.
  • Yergin, Daniel. The Prize: The Epic Quest for Oil, Money, and Power. New York: Simon & Schuster, 1991.

[edit] External links

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