Monopoly, Part I
Brian Trumbore
President/Editor, StocksandNews.com

The Atlantic Monthly magazine is celebrating its 150th anniversary this year and in doing so running excerpts from some of its more historical articles.

One of these was by muckraker Henry Demarest Lloyd, a March 1881 piece titled "Story of a Great Monopoly" and in looking up the full piece you have the tale of John D. Rockefeller, his Standard Oil Company, and the monopoly of the rail lines in terms of shipping petroleum and products such as kerosene.

But first, by the mid-1850s Americans were increasing their evening activities thanks to better and more extensive illumination. Gaslight was available in the cities since the 1820s, but it wasn't in the countryside where most Americans still lived. In urban areas coal gas was piped to customers, though because of the infrastructure cost, only in densely populated areas was it feasible.

Of course you also had whale oil, a product of the blubber that was fuel for lamps. Market historian John Steele Gordon writes in his book "An Empire of Wealth" that whereas in the early days, like starting in 1645, New England whalers didn't stray too far from shore and focused on right whales because they were so abundant, in 1712 "an offshore whaler was blown out to sea in a storm, and the crew managed to catch a sperm whale and bring it safely home."

It turns out the oil from a sperm whale was superior to that of other whales and they became highly profitable. Gordon writes:

"By 1765 New England whalers were calling at the Azores and were operating off the coast of Brazil soon afterward. By the 1770s New England was exporting three to four hundred thousand pounds of spermaceti candles a year."

And by the 1840s there were over 700 American whaling ships with each one unloading as many as 2,000 barrels of oil at the end of their voyages. Unfortunately, the business was too successful and they were catching sperm whales faster than the goliaths could reproduce. As John Steele Gordon writes, "the voyages became longer and longer (it was an American whaler who discovered the 'Bounty' mutineers on Pitcairn Island in 1808) (and) the price of whale oil rose steadily as demand continued to increase faster than supply."

In fact by the 1850s a gallon of whale oil cost $2.50 when $5 a week was a good wage for skilled labor. But as with other commodities in the history of the world, such a price led to a search for alternatives and one such substitute was coal gas, made by heating the rock. Another was kerosene, extracted from coal tar (what's left after the gas), which was first distilled in the 1850s.

[Gordon notes that coal tar also became a source for a whole new industry - chemicals - including for insecticides, plastics, paints and medicines.]

But the ultimate solution for illumination came from rock oil. John Steele Gordon:

"In 1853 a Dartmouth graduate named George Bissell happened to be visiting his old school when he saw in a professor's office a bottle of rock oil that had come from western Pennsylvania. He knew that the stuff was flammable and suddenly conceived of the idea that it could be turned into an illuminant."

Professor Benjamin Silliman, Jr. of Yale concluded "rock oil could easily be fractionated into various substances, including kerosene, by heating it. 'Gentlemen,' Silliman reported, 'it appears to me that there is much ground for encouragement in the belief that your Company have in their possession a raw material from which by simple and not expensive processes, they may manufacture very valuable products.'"

Of course they all looked around and said, "Good?but where do we get all the rock oil?" The only oil anyone had seen was in northwestern Pennsylvania where it could be skimmed off the waters of a creek that flowed into the Allegheny River.

But it was on a hot summer's day in 1856, with George Bissell sitting under a druggist's awning in New York City, that he had another revelation.

John Steele Gordon:

"(Bissell) noted an advertisement for a patent medicine made from rock oil that showed several derricks of the sort that were used to bore for salt. The rock oil used in the medicine, it happened, came from the oil obtained as a by-product of drilling for salt. Bissell wondered if it might be possible to use the technology of drilling to find oil."

Bissell hired a fellow by the name of Edwin Drake and after much difficulty, on August 27, 1859, Drake and his team of salt drillers struck oil outside Titusville, Pennsylvania. Basically, Drake had stumbled on a gusher, and a year later, as word spread and thousands poured into the region, Pennsylvania had produced 450,000 barrels of oil.

This oil, as it turned out, could easily be refined into good kerosene that wasn't just the perfect illuminant, it could also be used for heating and cooking. At first, though, the price of oil was $10 a barrel (around $150 in today's money), though as supply outstripped demand the price plummeted. By the end of 1861, a barrel of oil could be had for 10 cents; or less than the cost of the barrel itself.

But due to shortages created by the Civil War, oil rebounded back to $7.25 by September 1863 and by the end of the war had reached $13.75, thus fueling another round of speculation and a rush of prospectors.

And here's a classic tale, courtesy of Mr. Gordon and a separate piece he did for the November / December 2005 issue of American Heritage:

"In the tiny (northwestern Pennsylvania) town of Pithole the first oil well was drilled in January 1865. More and more wells came in, and by September the town was pumping 6,000 barrels a day, two-thirds of the total Pennsylvania production. A Pithole farm, considered virtually worthless for agriculture, sold for two million dollars in that month. Then, a couple of months later, the wells suddenly gave out. By early 1866 Pithole was a ghost town."

Suddenly, all were fearful. Was this the future of the entire oil industry? After all, the only crude that was known to exist in the entire world back then was in Pennsylvania and a sliver of upstate New York. Little was known of the science of geology and finding reserves. And with the wild price fluctuations, the refinery business was a mess and those who were brave enough to invest often employed tremendous amounts of leverage to finance their projects.

The early refineries were located in just two places, Pittsburgh and Cleveland, with Cleveland having a transportation edge. One man made the most of this?.John D. Rockefeller.

Now I'm not even going to attempt to do Rockefeller's story justice, but for the purposes of this piece, a little background is in order.

Rockefeller was born in Richford, New York in 1839, the son of William Avery Rockefeller, a commodities dealer, and his wife Eliza (Davison) Rockefeller. The family moved to a farm near Cleveland, Ohio, in 1853.

From "The Oxford Companion to United States History," edited by Paul S. Boyer:

"Combining his mother's pious humility and his father's brash ambition, Rockefeller early sought 'something big.' Becoming a partner in a produce business in 1859, Rockefeller began his business career in Cleveland as a bookkeeper. Viewing a contract as a covenant and trust as the basis of all business relationships, he won the respect of Cleveland's business community for his piety, seriousness, and perseverance. Coming of age at the dawn of the petroleum boom, Rockefeller, in partnership with his brother William, Henry M. Flagler, and others, established The Standard Oil Company of Ohio," which was incorporated in 1867 and "soon dominated the industry and commanded markets worldwide. His innovative vertical integration, from oil wells and pipelines to retail-distribution outlets, secured his company a competitive edge in a cut-throat business. His ruthless horizontal integration, involving merger with or eliminating competitors, won for Standard Oil a near monopoly."

For another take, here's a bit from George Brown Tindall and David E. Shi's "America: A Narrative History":

"While other young men were going off to war, Rockefeller moved into the oil business. In 1860, sent out by business friends to look over the Pennsylvania fields, he advised against the risks of sinking wells, but saw that refining promised great profits at little risk. In 1862 he backed a refinery started by his friend Samuel Andrews. He then formed a partnership with Andrews, and in 1867 added H.M. Flagler to create the firm of Rockefeller, Flagler, and Andrews."

Standard Oil Company of Ohio was then formed with a capitalization of $1 million and Rockefeller was already the largest refiner.

But as he put it, "the butcher, the baker, and the candlestick maker began to refine oil." As a result, "the price went down and down until the trade was ruined."

Tindall and Shi:

"Rockefeller resolved to bring order out of chaos, which is to say he decided to weed out the competition, and he soon fastened upon an ingenious plan. In 1872 Rockefeller created the South Improvement Company, which he made the marketing agent for a large percentage of his oil shipments. By controlling this traffic, he gained clout with the railroads, which gave him large rebates (secret discounts) on the standard freight rates in order to keep his business. In some cases he forced the railroads to provide information on competitors' shipments. Rockefeller then approached his Cleveland competitors and offered to buy them out at his own price. Most of them saw the wisdom of this course. As Rockefeller put it, 'the conditions were so chaotic [that is, competitive] that most of the refiners were very desirous to get out of the business.' By 1879 Standard Oil controlled 90- 95 percent of the oil refining in the country."

Well, you know what happens next. 90-95 percent of anything is a monopoly, and Standard Oil became the target of antitrust legislation and exposes by a new breed of muckraking journalists such as Henry Demarest Lloyd.

And so we'll pick up our story next week with the above mentioned Lloyd piece from The Atlantic Monthly, 1881.

Brian Trumbore