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Standard Oil -- Part I
Brian Trumbore
President/Editor, StocksandNews.com

This week we resume the story of the Sherman Antitrust Act and the way it has been applied in United States corporate history, specifically the case of Standard Oil. And when you're talking Standard Oil, you're talking John D. Rockefeller.

But while I'm not about to tell the full life story of Rockefeller (which I'll save for another time), it certainly is necessary to disclose some bare facts in order to fully understand the issue. And as we cover the Standard Oil case these next few weeks, think about some of the comments that are made and the current antitrust case against Microsoft. You'll find a few interesting parallels.

Rockefeller was born in 1839, the son of a bigamist and snake-oil salesman. As a youth he moved to Cleveland, a strategically positioned city considering the boom that was about to take place.

In 1859, the first oil well was struck in Titusville, PA. The boom was on. Granted, it started small, but by the next year, John D. Rockefeller knew this was the field he wanted to be in. Only he advised against sinking wells. Better, he thought, to control the refining process which promised great profits with little risk.

At first, petroleum was fetching $20 a barrel (roughly the same price as today). Then a rush of oil came and the price fell to 10 cents a barrel just 2 years later, only to rise to $7 in 1868, and then back down to below $4 in 1870. In these early days, petroleum was used ostensibly to produce kerosene.

As a location, Cleveland proved to be a key transit point with connections to the fledgling railroad industry as well as shipping connections. The oil fields of western Pennsylvania were close by.

In 1867 Rockefeller put five big refineries into one firm, Rockefeller, Andrew & Flagler. Then in 1870 he reorganized as Standard Oil of Ohio (hereinafter, Standard). At the time the company owned the refineries, a fleet of oil tank cars, warehouses Pennsylvania's oil fields, warehouses in New York, a barrel- making plant, and a forest to supply it with lumber.

Standard's Clevandon Plant could refine the enormous total of 50 barrels a day. While this was only 4% of U.S. output at the time, Rockefeller quickly controlled the key competition for transport facilities. This enabled him to gain favorable shipping rates. From this point on, Standard grew as John D. put the railroads, legislatures, everyone, under pressure to give him breaks. By the early 1880s, he controlled 90-95% of all the oil refined in America.

Quickly, Rockefeller was able to dispose of his competition. By controlling the distribution network, he cut prices, forcing out the competition in the Cleveland area, driving his opponents into bankruptcy and then buying them out. Controlling the refining process enabled him to dictate prices to driller and retailer alike.

In his book, "Money, Greed, and Risk," author Charles Morris comments on John D.

"(Rockefeller) was an agent of what the economist Joseph Schumpeter called 'creative destruction.' Although his methods could be very rough, and he paid enormous bribes, he was the first, and possibly the greatest, genius of large-scale enterprise. An extraordinary combination of piratical entrepreneur and steady-handed corporate administrator, he achieved dominance primarily by being more farsighted, more technologically advanced, more ruthlessly focused on costs and efficiency than anyone else. When Rockefeller was consolidating the refining industry in the 1870s, for example, he simply invited competitors to his office and showed them his books. One refiner - who quickly sold out on favorable terms - was 'astounded' that Rockefeller could profitably sell kerosene at a price far below his own cost of production. Rockefeller just razed the new properties and incorporated their production into his own plants, which were typically 10 to 50 times larger."

The railroad barons were key to John D.'s success. By having them under his influence, he could increase freight charges to unreasonable levels as well, driving out competitors. Other times, competitors would offer oil at a lower price but the buyer would be scared to offend the trust.

But by 1880, Standard was constantly drawing the attention of state legislatures (those John D. hadn't reached) and the company was being hauled before the courts.

During the period 1879-1882, Rockefeller created the "trust," a vehicle by which he could coordinate all of the production, refining, transportation, and distribution activities with the main Standard Oil. This allowed the various companies, in the case of Standard 14 wholly owned ones (including Standard Oil of Ohio) and 26 partially owned firms, to invest in each other, a new format at the time which remained in place until 1892 when Standard was booted out of Ohio due to antitrust investigations (spearheaded by an aggressive attorney general, David Watson).

In 1891, New Jersey, looking for tax revenue so it could combat its mosquito problem (well, why not?), became the first state to allow corporations to own stock of other corporations in their own right. So Standard Oil rushed to incorporate in New Jersey, and the trust form of organization vanished from the American economy.

This same era also witnessed the emergence of the "muckraker," journalists who thrived on exposing scandal. Or as Teddy Roosevelt was to later say, "The muckrakers are often indispensable to society, but only if they know when to stop raking the muck."

Henry Demarest Lloyd was one of the first of this new breed. In 1881, Atlantic Monthly ran an article written by the young financial editor of the Chicago Tribune. Lloyd criticized Standard Oil and the emerging trust format, making him instantly famous and paving the way for the 1894 book "Wealth Against Commonwealth," in which he continued to expose the growth of corporate giants responsible to none but themselves, able to corrupt if not control governments. In the case of Standard, he alleged that Rockefeller, in his efforts to influence the Pennsylvania legal climate, did "everything to the legislators except refine them." Another Lloyd statement was that "when Stephenson said of railroads that where combination was possible competition was impossible, he was unconsciously declaring the law of all industry."

But perhaps the most famous muckraker was Ida M. Tarbell, or as Rockefeller none too affectionately called her, Ida Tarbarrel.

Tarbell was raised in the heart of Pennsylvania oil country. Her father had been an independent oil producer who was put out of business by Rockefeller. By the time she started writing about Standard, she was already well known for her articles on Lincoln and Napoleon and was one of the highest-paid journalists of her day.

Ida's "History of the Standard Oil Company" (1904) provided a more detailed treatment than Lloyd's earlier book. Historian Charles Geisst provides Tarbell's conclusion:

"So long as railroads can be persuaded to interfere with independent pipelines, to refuse oil freight, to refuse loading facilities, lest they disturb their relations with the Standard Oil Company, it is idle to talk about investigations, or antitrust legislation or application of the Sherman law. So long as the Standard Oil Company can control transportation as it does today, it will remain master of the oil industry and the people of the United States will pay for their indifference and folly."

Standard's counsel, S.C.T. Dodd replied:

"But men whose integrity is such as to permit them to be entrusted with the management of large capital, whose intellectual grasp of principles and details is such as to command with their products the markets of the world, are those who will soonest realize that the policy which succeeds is that which accords fair treatment to all." [Gates… Microsoft?]

Next week the story continues.

Sources:
"Monopolies in America," Charles Geisst
"Money, Greed, and Risk," Charles Morris
"The Pursuit of Wealth," Robert Sobel
"The American Century," Harold Evans
"A History of the American People," Paul Johnson
"America," George Brown Tindall and David Shi

Brian Trumbore

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