Standard Oil

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Standard Oil (1870–1911) was a large, integrated, oil producing, transporting, refining, and marketing organization. Image:Standard Oil.jpg

1 Introduction
2 Origins
3 Business strategy
4 Monopoly charges
5 Successors
6 See also
7 References
8 External links

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Introduction

Standard Oil began as an Ohio partnership formed by 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.

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 "anti-trust" 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 reliquishing 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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Origins

Oil was first struck in Titusville, Pennsylvania, which began the first oil rush. The main product of the oil business was kerosene, which was rapidly supplanting whale oil as the choice fluid for oil lamps due to its lower cost. However, the cost and quality of kerosene at that time varied greatly based on the way it was refined. In 1863, British chemist Samuel Andrews had developed a superior method of refining oil into kerosene and was looking for investors to set up a refinery. He found an investor in John D. Rockefeller. In 1865, Rockefeller was so confident of the growth of the oil business that he purchased additional refining capacity and formally partnered with Andrews to form Rockefeller and Andrews. Soon afterward, Cleveland became one of five major refining areas (along with Pittsburgh, Philadelphia, New York, and the region in Northeastern Pennsylvania where most of the oil was produced). At about the same time Rockefeller's brother, William, started another refinery. In 1867 Rockefeller & Andrews absorbed this business and the business of Henry Morrison Flagler to form the partnership of Rockefeller, Andrews & Flagler.

Cleveland with its port on Lake Erie and service by the three major railroads of the day was a logical center for oil refining. Standard sought to leverage this advantage with favorable rates from the competing railroads, using that advantage to underprice the competition and buy out its weakest rivals. Given their low prices and superior "standardized" product, Standard steadily grew its market share. The larger it grew, the more power they had, and exercised, over their suppliers, including the oil producers and railroads, to get better deals. By the early 1870s, Standard was so dominant that even well-run rivals could no longer effectively compete. In 1874, Rockefeller acquired the oil interests of Charles Pratt and Company, one such competitor with both superior management and product, but without the economies of scale Standard had been able to achieve. The founder Charles Pratt (1830-1891) and his protégé Henry Huttleston Rogers (1840-1909) became directors in Standard Oil. In 1882, when the company was reorganized as the Standard Oil Trust, the senior partners were John D. Rockefeller, his brother William, and Rogers.

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Business strategy

Standard Oil's market position had been established through aggressively competitive (some say anti-competitive) business practices 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. Railroads were willing to give Rockefeller volume discounts in exchange for him shipping at least 60 barrels per day and handling the loading and unloading on his own. 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.

Image:STNDOIL2.GIF

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 trusts 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. Standard Oil Trust quickly attracted attention from antitrust authorities leading to a lawsuit filed by then Ohio Attorney General David K. Watson. Image:STNDOIL.GIF 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 fuelled growing public attacks on Standard Oil and on trusts 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 $548,436,000. A large part of the profits was not distrib- uted 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. [Jones pp 89-90]

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Monopoly charges

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 kerosine, of which 55% was exported aroud 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. [Jones pp 58-59, 64] 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." [Jones pp 65-66] Gradually, its market share fell to 64% by 1911. By 1911, it was in competition with Associated Oil and Gas, Texaco, Gulf Oil, and 147 independent refineries. (DiLorenzo, Thomas The ghost of John D. Rockefeller) Standard did not try to monopolize the exporation and pumping of oil (its share in 1911 was 11%).

As the public became more aware of the Standard Oil trust 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: [Manns p 11]

"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: [Jones p 73]

"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:[Jones p 75-76]

"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 monopolistsic customers, but lowered them to hurt competitors, often disguising its illegal actions by using bogus supposedly "independent" companies it controlled. [Jones p. 80]

"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."

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" (Congressional Record, 51st Congress, 1st session, House, June 20, 1890, p. 4100). However, those who oppose antitrust tend not to support competition as an end in itself but for its results --low prices. As long as a monopoly is not a coercive monopoly where a firm is securely insulated from potential competion, 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 wrongly harms the firm and consumers. This line of thought has never been enacted into law; the Sherman Act remains the law in 2006. [1] [2]

In 1911 the company was broken up after the United States Supreme Court declared the trust to be an "unreasonable" monopoly under the Sherman Antitrust Act. Thus, on May 15, 1911, the Supreme Court of the United States ordered the dissolution of Standard Oil Company into 34 smaller companies, each with their own board of directors. 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. 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 <ref>David I. Rosenbaum, Market Dominance: How Firms Gain, Hold, or Lose it and the Impact on Economic Performance Praeger Publishers. 1998. pp 31-33. </ref>

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Successors

Successor companies to Standard Oil include:

Standard Oil of Ohio - or Sohio now part of BP
Standard Oil of Indiana - or Stanolind, renamed Amoco (American Oil Co.) - now part of BP
Standard Oil of New York - or Socony and merged with Vacuum - renamed Mobil, now part of ExxonMobil
Standard Oil of New Jersey - or Esso (S.O. or Eastern States Standard Oil) - renamed Exxon, now part of ExxonMobil
Standard Oil of California - or Socal - renamed Chevron
Atlantic and Richfield - merged to form Atlantic Richfield or Arco - now part of BP - Atlantic operations spun off and bought by Sunoco
Standard Oil of Kentucky - or Kyso was acquired by Standard Oil of California - currently Chevron
Continental Oil Company - or Conoco now part of ConocoPhillips
The Ohio Oil Company - more commonly referred to as "The Ohio", and marketed gasoline under the Marathon name. Company is now known as Marathon Oil Company, and was often a rival with in-state Standard spinoff Sohio.

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

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References

Chernow, Ron. Titan: The Life of John D. Rockefeller, Sr. (2004)
DiLorenzo, Thomas. The Ghost of John D. Rockefeller June 1 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), the standard history
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), the standard history
Latham, Earl ed. John D. Rockefeller: Robber Baron or Industrial Statesman? (1949). Primary and secondary sources
Nevins, Allan. Study in power: John D. Rockefeller, industrialist and philanthropist (1954). There are numerous editions and versions of this famous biography.
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. ch 1.
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Tarbell, Ida M. The History of the Standard Oil Company (1904), There are numerous editions and abridgements of this famous muckraking book.
Williamson, Harold F. and Arnold R. Daum. The American Petroleum Industry: The Age of Illumination, 1859-1899 (1959) also: vol 2, American Petroleum Industry: the Age of Energy 1899-1959 (1964)
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.