Standard Oil case study
John D. Rockefeller and the Standard Oil Trust
This is the story of John D. Rockefeller, founder of the Standard Oil Company.
It is the story of a somber, small-town boy who dominated the oil industry
with organizational genius, audacity, and ruthless, methodical execution. He
became the richest man in America and, for a time, the most hated.
Rockefeller’s life spanned nearly 98 years. At his birth Martin Van Buren
was president and settlers drove covered wagons over the Oregon Trail. He
lived to see Franklin Roosevelt’s New Deal, watch the rise of the Nazi party in
Germany, and hear Frank Sinatra and The Lone Ranger on radio.
The historical backdrop of this lifetime is an economy gripped by the fever
of industrial progress. Rockefeller built his fortune in an era that lacked many
of today’s ethical norms and commercial laws, an era in which the power of a
corporation and its founder could be exercised with fewer restraints.
THE FORMATIVE YEARS
John Davison Rockefeller was born July 8, 1839, in a small village in southern
New York. He was the second of six children and the oldest boy. His father,
William Rockefeller, was an itinerant quack doctor who sold worthless elixirs.
He was jovial, slick, and cunning and made enough money to keep the family
in handsome style until he had to flee and live away from home to avoid arrest
for raping a local woman. After that, he visited only in the dark of night. But
he taught young John D. and his brothers lessons of business conduct, especially
that sentimentality should not influence business transactions. “I cheat my
boys every chance I get,” he once said. “I want to make ‘em sharp.”1
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John D.’s mother was a somber, religious woman who gave the children a
strict upbringing, emphasizing manners, church attendance, and the work
ethic. She preached homilies such as “Willful waste makes woeful want.” And
she taught charity to the children; from an early age John D. made regular
contributions to worthy causes.
Young John D. was not precocious in school. In high school he was an
uninspired student, little interested in books and ideas, but willing to work
hard. He grew into a somber, intense lad nicknamed “the Deacon” by his
classmates because he faithfully attended a Baptist church and memorized
hymns. In the summer of 1855 he took a three-month course at a business
college in Cleveland, Ohio, and then set out looking for a job. In addition to his
formal
schooling,
he
carried
the
contradictory
temperaments
of
his
parents—the wily, self-assured boldness of his father and the exacting,
pietistic character of his mother. He internalized both, and the combination
was to prove formidable. Here was a man with the precision of an accountant
and the cunning of Cesare Borgia.
EARLY BUSINESS CAREER
Rockefeller’s first job was as a bookkeeper at a Cleveland firm where he
meticulously examined each bill submitted and pounced on errors. He also
recorded every cent he earned and spent in a personal ledger. Its pages show
that he was parsimonious and saved most of his $25-a-month salary, but that
he still gave generously to the Baptist church and the poor.
In 1859 he formed a successful partnership with two others in the produce
business in Cleveland and proved himself an intense negotiator, described by an
acquaintance as a person “who can walk right up on a man’s shirt bosom and
sit down.”2 The business boomed from supplying food to the Union army
during the Civil War. Although in his early 20s at the time, the steady,
unemotional lad was never touched by patriotic fervor. In those days, the law
permitted any man of means to pay someone else to serve in his place, and this
he did.
BEGINNINGS OF THE OIL BUSINESS
Profits from the produce business were high, and John D. looked around for a
promising new investment. He soon found one—a Cleveland petroleum
refinery in which he invested $4,000 in 1863. At the time, petroleum
production and refining was an infant industry. A new drilling technology had
led to an 1859 oil strike in nearby Pennsylvania, followed by a frenzied boom
in drilling and refining.
Soon Rockefeller devoted himself to the oil business, and he began to apply
his principles of parsimony. One basic principle was to avoid paying a profit to
anyone. For example, instead of buying barrels and paying the cooper $2.50
each, Rockefeller set up his own barrel-making factory and made them for
$.96. He purchased a forest to make staves from his own trees. Another basic
principle was methodical cost cutting. Lumber for barrel staves was kiln-dried
before shipment to the cooperage plant. Water evaporated from the wood,
making it lighter and lowering transportation costs.
Though obsessed with details and small economies, Rockefeller also proved
aggressive in larger plans. He borrowed heavily from banks to expand the
refinery. The risk scared his partners, so he bought them out. In 1865 he
borrowed more to build a second refinery. Soon he incorporated an export
sales company in New York, making the world his market.
DYNAMICS OF THE OIL INDUSTRY
During this early period, the new industry was in a chaotic state. A basic cause
was overproduction in the Pennsylvania oil regions, which were the only source
of crude oil. The price of crude fluctuated wildly, but was in long-term decline.
Each drop in the price of crude oil encouraged construction of new refineries
and by the late 1860s refining capacity was three times greater than oil
production. This caused vicious price wars. Some refiners tried to stay in
business by selling products at a loss to raise cash for continued debt payments.
In doing so, they dragged down profit margins for all refiners.
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Rockefeller had the insight to invest in large-scale refineries and, because he
cut costs relentlessly, his refineries made money. Yet despite disciplined cost
control, the market forces of a sick industry ate away at his net earnings. He
believed it was time to “rationalize” the entire industry and stop destructive
competition.3 His method for doing this would be monopoly, his tactics
hard-nosed.
ROCKEFELLER’S COMPETITIVE STRATEGIES
Rockefeller used a range of competitive strategies. He was a low-cost,
high-volume producer. He used debt financing to expand. He attempted to
make his refined petroleum products of high and consistent quality, since
fly-by-night refiners turned out inferior distillates. Cheap kerosene with a low
ignition point had burned many a home down after exploding in a wick lamp.
When he incorporated the Standard Oil Company of Ohio in 1870, the name
suggested a “standard oil” of uniformly good quality. He engaged in vertical
integration by making wooden barrels. As time when on, he also bought
pipelines, storage tanks, and railroad tank cars.
Critical to his success, however, was the art of strong-arming the railroads.
In this, Rockefeller was the master. Transportation costs paid to railroads were
important to refiners, who shipped in crude oil and then shipped out products
such as kerosene or lubricating oil. In the 1860s railroads were highly
competitive and often altered shipping rates to attract business. No law
prohibited this, and published rates were only the starting point of
negotiations.
Railroads often granted rebates to shippers; that is, they returned part of
the freight charge after shipment. These rebates were usually secret and given
in return for the guarantee of future business. Large volume shippers, including
oil refineries, got the biggest rebates. Standard Oil was no exception.
At this time, Rockefeller has been described by biographers as a
prepossessing man with penetrating eyes who drove a hard bargain. He would
take the measure of a person with a withering stare, and few were his match.
He was formidable in negotiations, being invariably informed in detail about
the other’s business. And he was still a pious churchgoer who read the Bible
nightly before retiring.
Late in 1870 Rockefeller hatched a brazen plan for stabilizing the oil
industry at the refining level. In clandestine meetings, he worked out a rebate
scheme between a few major refiners and the three railroads going into the
Pennsylvania oil regions. They gave this scheme an innocent-sounding name,
the South Improvement Plan. In it, the railroads agreed to increase published
rates for hauling oil. Then Rockefeller’s Cleveland refineries and a few others
would get large rebates on each barrel shipped. For example, the regular rate
between the oil regions and Cleveland would be $.80 a barrel and between
Cleveland and New York $2.00 a barrel. It would cost a total of $2.80 per
barrel for any other refinery in Cleveland to bring in a barrel of crude oil and
ship a barrel of refined oil to New York for sale or export. Rockefeller and his
accomplices, on the other hand, would be charged $2.80 but then get a rebate
of $.90.
In addition, the refineries participating in the South Improvement Plan
received drawbacks or payments made on the shipment of oil by competitors!
Thus, Rockefeller would be paid $.40 on every barrel of crude oil his
competitors shipped into Cleveland and $.50 on every barrel of refined oil
shipped to New York. Under this venal scheme, the more a competitor shipped,
the more Rockefeller’s transportation costs were lowered. While competitors
were charged $2.80 on the critical route (Pennsylvania oil regions–Cleveland–
New York), Rockefeller paid only $1.00. Moreover, the railroads agreed to give
the conspirators waybills detailing competitors’ shipments; a better espionage
system would be hard to find.
Why did the railroads agree to this plot? There were several reasons. First,
it removed the uncertainty of cutthroat competition. Oil traffic was
guaranteed in large volume. Second, the refiners provided services to the
railroads including tank cars, loading facilities, and insurance. And third,
railroad executives received stock in the participating refineries, giving them a
stake in their success.
The consequences of the South Improvement Plan were predictable.
Nonparticipating refiners faced bloated transportation costs and would be
uncompetitive. They had two choices. Either they could sell to Rockefeller and
his allies, or they could stand on principle and go bankrupt. When they sold, as
they must, the flaw in industry structure would be corrected. Rockefeller
intended to acquire them, then close them or limit their capacity. This would
give him market power to stabilize the price of both crude oil and refined
products. And the rebates would be a formidable barrier to new entrants.
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THE CONSPIRACY PLAYS OUT
In February 1872 the new freight rates were announced. Quickly, the full
design was revealed, causing widespread, explosive rage in the oil regions.
Although it broke no laws, it overstepped prevailing norms. People believed
that since railroads got their right-of-ways from the public they had a duty to
serve shippers fairly. Volume discounts might be justified, but this shakedown
was extortionate. Producers and refiners in the oil regions boycotted the
conspirators and the railroads.
Rockefeller, seen as the prime mover behind the South Improvement Plan,
was vilified in the industry and the press. His wife feared for his life. Yet he
never wavered. “It was right,” he said of the plan. “I knew it as a matter of
conscience. It was right between me and my God.”4 As journalist Ida Tarbell
noted, Rockefeller was not squeamish about such business affairs.
Mr. Rockefeller was “good.” There was no more faithful Baptist in Cleveland
than he. Every enterprise of that church he had supported liberally from his
youth. He gave to its poor. He visited its sick. He wept with its suffering.
Moreover, he gave unostentatiously to many outside charities . . . Yet he was
willing to strain every nerve to obtain himself special and unjust privileges from
the railroads which were bound to ruin every man in the oil business not
sharing them with him.5
Within a month, the weight of negative public opinion and loss of revenue
caused the railroads to cave in. They rescinded the discriminatory rate
structure. All appearances were of a Rockefeller defeat, but appearances
deceived. Rockefeller had moved quickly, meeting one by one with rival refiners,
explaining the rebate scheme and its salutary effect on the industry, and
asking to buy them out. He offered the exact value of the business in cash or,
preferably, in Standard Oil Company stock.
By the time the railroads reset their rates, Rockefeller had bought out 21 of
his 26 Cleveland competitors. Some acquisitions were simply dismantled to
reduce surplus capacity. He now dominated Cleveland, the country’s major
refining center, and controlled more than a quarter of U.S. capacity. In secrecy,
he negotiated a new rebate agreement with the Erie Railroad. Of these actions,
Ida Tarbell noted sardonically: “He had a mind which, stopped by a wall,
burrows under or creeps around.”6
Regardless of methods, he had, indeed, corrected structural flaws in the oil
industry. It would attract more capital. If any circumstance cast a shadow
over this striking victory, it was that public opinion had turned against him.
From then on, he was reviled as an unfair competitor, hatred of him growing
apace with his burgeoning wealth. He never understood why.
ONWARD THE COURSE OF EMPIRE
Rockefeller, now 33, was wealthy. Yet he drove on, compelled to finish a grand
design, to spread his pattern over the industry landscape, to conform it to his
vision.
He continued the strategy of horizontal integration at the refinery level by
absorbing more and more of his competitors. As the size of Standard Oil
increased, Rockefeller gained added leverage over the railroads. Like an
orchestra conductor he played them against each other, granting shares of the
oil traffic in return for rebates that gave him a decisive advantage.
Some competitors stubbornly clung to their businesses, partly out of hatred
for Rockefeller. He made them “sweat” and “feel sick” until they sold. 7 The
fleets of tank cars that he leased to railroads were often “unavailable” to ship
feedstock and distillates to and from such refiners. Rockefeller concealed many
of his acquisitions, disguising the full sweep of his drive to monopoly. These
companies were the Trojan horses in his war against rival refiners. They
seemed independent but secretly helped to undermine Standard’s competitors.
Often they were at the center of elaborate pricing conspiracies involving code
words in telegrams such as “doubters” for refiners and “mixer” for railroad
drawbacks. The phantoms bought some refiners who refused in principle to sell
out to Standard Oil. Their existence confronted independents with a dark,
mysterious force that could not be brought into the light and fought.
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THE STANDARD OIL TRUST
By 1882 Rockefeller’s company was capitalized at $70 million and produced
90 percent of the nation’s refining output. Its main product, illuminating oil,
was changing the way people lived. Before the sale of affordable illuminating oil
of good quality, most Americans went to bed with darkness. They could not
afford expensive candles or whale oil and feared using the unstable kerosene
made by early, small refiners. With the rise of Rockefeller’s colossus, they had
reliable, inexpensive light and stayed up. Their lives, and the life of the nation,
changed.
Rockefeller reorganized Standard Oil as a trust.8 His purpose was to make
state regulation more difficult. Soon other large companies followed his lead,
adopting the trust form to avoid government restrictions. Inside Standard Oil,
Rockefeller’s organizing skills were extraordinary. Working with a loyal inner
circle of managers, he directed his far-flung empire from headquarters at 26
Broadway in New York City. As he absorbed his competitors, so had he
co-opted the best minds in the industry and much of Standard’s success is
attributable to this stellar supporting cast. Though dominant, Rockefeller
delegated great responsibility to his managers.
High-level
committees
controlled
business
operations.
He
circulated
monthly cost statements for each refinery, causing fierce internal competition
among their managers that led to high performance. He set up a network of
informants around the globe. Critics called them spies, but they functioned as a
well-organized information system.
A perfectionist, he insisted on having a statement of the exact net worth of
Standard Oil on his desk every morning. Oil prices always were calculated to
three decimals. He was so dogged about efficiency and recycling that his
Standard Oil plants might win environmental awards were they operating
today. At night he prowled the headquarters turning down wicks in oil lamps.
His management style was one of formal politeness. He never spoke harshly
to any employee. Once, when a manager leaked information to the press,
Rockefeller said to his secretary: “Suggest to Mr. Blank that he would do
admirably as a newspaper man, and that we shall not need his services after
the close of this month.”9 Compared with other moguls of that era, he lived
simply. He had two large estates, in Cleveland and New York, but neither was
too ostentatious. He read the Bible daily, continued regular attendance at a
Baptist church, and gave generously to charities.
Rockefeller’s organizing skills were critical to his success. Discussions often
focus on his ethics, but the key to Standard Oil’s long-term domination lay
elsewhere. The company was an immense, organized force opposed only by
smaller, less united adversaries. Its success came from centralized, coordinated
effort. Compromising methods, to the extent they were used, were of far less
importance.10
EXTENDING DOMINATION
By the 1880s Standard Oil had overwhelming market power. Its embrace of
refining activity was virtually complete, and it had moved into drilling,
pipelines, storage tanks, transportation, and marketing of finished products.
By now the entire world was addicted to kerosene and other petroleum
products, and Standard’s international sales grew.
Rockefeller’s dominating competitive philosophy prevailed. His marketing
agents
were
competition,
ordered
his
to
employees
intelligence-gathering
destroy
independent
pioneered
network
paid
fanatical
suppliers.
To
customer
service.
competitors’
employees
suppress
to
The
pass
information to Standard Oil. Railroad agents were bribed to misroute
shipments. Standard Oil workers climbed on competitors’ tank cars and
measured the contents. Price warfare was relentless. A stubborn competitor
often found Standard selling kerosene to its customers at a price substantially
below production cost.
Page 80
Rockefeller himself was never proved to be directly involved in flagrant
misconduct. He blamed criminal and unethical actions on overzealous
subordinates. His critics thought the strategy of suffocating small rivals and
policies such as that requiring regular written intelligence reports encouraged
degenerative ethics among his minions.
Rockefeller saw Standard Oil as a stabilizing force in the industry and as a
righteous crusade to illuminate the world. How, as a good Christian devoted to
the moral injunctions of the Bible, was Rockefeller able to suborn such vicious
behavior in commerce? One biographer, Allan Nevins, gives this explanation:
From a chaotic industry he was building an efficient industrial empire for what
seemed to him the good not only of its heads but of the general public. If he
relaxed his general methods of warfare . . . a multitude of small competitors
would smash his empire and plunge the oil business back to chaos. He always
believed in what William McKinley called “benevolent assimilation”; he
preferred to buy out rivals on decent terms, and to employ the ablest
competitors as helpers. It was when his terms were refused that he ruthlessly
crushed the “outsiders.” . . . It seemed to him better that a limited number of
small businesses should die than that the whole industry should go through a
constant process of half-dying, reviving, and again half-dying.11
THE STANDARD OIL TRUST UNDER ATTACK
Standard Oil continued to grow, doubling in size before the turn of the century
and doubling again by 1905.12 Eventually its very size brought a flood of
criticism that complicated operations. Predatory monopoly was at odds with
prevailing beliefs about individual rights and free competition. The states tried
to regulate Standard Oil and filed antitrust suits against it. Overwrought
muckrakers lashed out at Rockefeller. Because of him, wrote one, “hundreds
and thousands of men have been ruined.”13 He was the personification of greed
in political cartoons. Politicians not suborned by his bribery lambasted him.
Rockefeller, by now the richest American, was shaken by public hatred. He
hired bodyguards and slept with a revolver. Pinkerton detectives were present
at church on Sundays to handle gawkers and shouters. He developed a
digestive ailment so severe that he could eat only a few bland foods, and upon
his doctor’s advice he stopped daily office work. By 1896 he appeared only
rarely at 26 Broadway. Soon he was afflicted with a nervous disorder and lost
all his hair.
As attacks on Rockefeller grew, the vise of government regulation tightened
on his company. A swarm of lawsuits and legislative hearings hung about it.
Finally, in 1911, the Supreme Court ordered its breakup under the Sherman
Antitrust Act, holding that its monopoly position was an “undue” restraint on
trade that violated the “standard of reason.”14 The company was given six
months to separate into 39 independent firms. The breakup consisted mainly
of moving the desks of managers at 26 Broadway and was a financial windfall
for Rockefeller, who received shares of stock in all the companies, the prices of
which were driven up by frenzied public buying. Before the breakup kerosene
sales had buoyed the company. However, just as electric lightbulbs were
replacing oil lamps, the automobile jolted demand for another petroleum
distillate—gasoline. Rockefeller, who was 71 at the time of the breakup and
would live another 26 years, earned new fortunes simply by maintaining his
equity in the separate companies.
Rockefeller remained a source of fascination for the American public. As The
Wall Street Journal noted, “The richest man in a world where money is power
is necessarily a fascinating object of study.”15 This being so, it was his enduring
misfortune that muckraking journalist Ida Tarbell turned her gaze on him.
Tarbell
wrote
two-volume
two
biography
unflattering
of
character
Rockefeller,
all
studies
and
serialized
in
a
the
detailed,
widely
read McClure’s Magazine between 1902 and 1905. Her unsentimental words
were no less ruthless than the actions of the old man himself. Although
admitting that Rockefeller and Standard Oil had some measure of “legitimate
greatness,” she was obsessed with his flaws. In one essay she found “something
indefinably repulsive” in his appearance, writing that his mouth was “the
cruelest feature of his face,” and that his nose “rose like a thorn.”16 Such ad
hominem attacks lacked merit but, in addition, Tarbell delved deeply into
Rockefeller’s career, producing narratives of exquisite detail. The thesis she
conveyed to the public was that by his singular example, Rockefeller was
responsible for debasing the moral tone of American business. She believed his
story incited legions of the ambitious to use cold-blooded methods, teaching
them that success justifies itself. Like the master, the junior scoundrels often
cited biblical verse to support their actions.
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Few public figures have a nemesis such as Ida Tarbell. Her relentless pen,
along with others, deprived him of some public adulation he may have craved
and her scholarship permanently defined him. Her intricate period research
cannot be duplicated and subsequent biographers, even more friendly ones,
must go to it for insight. Rockefeller may or may not have deserved such a
definitive hand. He called her a “poisonous woman.”17
THE GREAT ALMONER
Since childhood Rockefeller had made charitable donations and, as his fortune
accumulated, he increased them. After 1884 the total was never less than
$100,000 a year, and after 1892 it was usually over $1 million and
sometimes far more. In his mind, these benefactions were linked to his duty as
a good Christian to uplift humanity. To a reporter he once said:
I believe the power to make money is a gift from God—just as are the instincts
for art, music, literature, the doctor’s talent, yours—to be developed and used
to the best of our ability for the good of mankind. Having been endowed with
the gift I possess, I believe it is my duty to make money and still more money
and to use the money I make for the good of my fellow-man according to the
dictates of my conscience.18
Over his lifetime, Rockefeller gave gifts of approximately $550 million. He
gave, for example, $8.2 million for the construction of Peking Union Medical
College in response to the need to educate doctors in China. He gave $50
million to the University of Chicago. He created charitable trusts and endowed
them with millions. One such trust was the General Education Board, set up in
1902, which started 1,600 new high schools. Another, the Rockefeller
Sanitary Commission, succeeded in eradicating hookworm in the South. The
largest was the Rockefeller Foundation, established in 1913 and endowed with
$200 million. Its purpose was “to promote the well-being of mankind
throughout the world.” Rockefeller always said, however, that the greatest
philanthropy of all was developing the earth’s natural resources and employing
people. Critics greeted his gifts with skepticism, thinking them atonement for
years of plundering American society.
In his later years, Rockefeller lived a secluded, placid existence on his great
Pocantico estate in New York, which had 75 buildings and 70 miles of roads.
As years passed, the public grew increasingly fond of him. Memories of his early
business career dimmed, and a new generation viewed him in the glow of his
huge charitable contributions. For many years, he carried shiny nickels and
dimes in his pockets to give to children and well-wishers.
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