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Category — Standard Oil/John D. Rockefeller

Capitalism Vindicated: The Real History of Standard Oil (Part V: Lessons)

[Editor Note: This five-part series by Mr. Epstein, originally published in The Objective Standard, revisits the Standard Oil Trust controversy in this the 100th anniversary of the breakup of the Trust. Part I reviewed the flawed textbook interpretation of Rockefeller's accomplishment; Part II sketched the rise of Standard Oil and defended the free-market practice of rebating. Part III examined the missing context of Standard Oil's rise to dominance. Part IV was on Standard's pioneering innovations as a big business.]

Given the tenuous, voluntary nature of Standard’s market share, it was inevitable that at some point the market would expand beyond its reach. Given the explosion of possibilities in the oil industry—the rise of the automobile and the need for gasoline, the discovery of oil in all corners of the planet—not even Standard Oil could be the best at everything. It certainly did not help that Rockefeller became progressively less involved in the company’s affairs starting in the 1890s.

The fact that Standard was bound to lose market share did not prevent it from growing. It could and did continue to grow, while others grew, too. Its market percentage shrank, even as its market grew—and changed.

Competition Unbound

Between 1899 and 1914, the market for kerosene shrank with the rise and continuous improvement of Edison’s lightbulb, and with the rise of the automobile. Kerosene dropped from 58 to 25 percent of refined products, whereas gasoline rose from 15 to 48 percent. The age of kerosene, which Standard had dominated, was over.

In the early 1900s, many more competitors came on the scene, some of whom remain household names: Associated Oil and Gas, Texaco, Gulf, Sun Oil, and Union Oil, to name a few. Whereas the number of refineries had once shrunk due to a glut of inefficient ones, new demand across a wide variety of locations along with better business organization and better technology led to a growth in the number of separate refineries—from 125 in 1908 to 147 in 1911.

Between 1898 and 1906, Standard’s oil production increased, but its market share of oil production declined from 34 to 11 percent. Similarly, in the realm of refining, Standard’s market share declined, while its volume increased steadily from 39 million barrels in 1892 to 99 million in 1911.81

By the early 1900s, Standard Oil had provided the world with an illustration of the magnificent productive achievements that are made possible by economic freedom. It had shown that when companies are free to produce and trade as they choose, to sell to as many willing customers as they can, a man or a company of extraordinary ability can make staggering contributions to human life—in this case, lighting up the world, fueling transportation, and pioneering corporate structures that would make every other industry more productive in the decades to come. [Read more →]

September 2, 2011   2 Comments

The Real History of the Standard Oil Company (Part IV: Pioneering in Big Business)

[Editor Note: This five-part series by Mr. Epstein, originally published in The Objective Standard, revisits the Standard Oil Trust controversy on this the 100th anniversary of the breakup of the Trust. Part I reviewed the flawed textbook interpretation of Rockefeller's accomplishment; Part II sketched the rise of Standard Oil and defended the free-market practice of rebating. Part III examined the missing context of Standard Oil's rise to dominance.

Part V tomorrow examines the unlearned lessons of the John D. Rockefeller/Standard Oil saga.

If antitrust theory was correct, Standard’s “control” of 90 percent of the oil refining market, should have made the 1880s its easiest, least-challenging decade—one in which it could coast, pick off competitor fleas with ease, and raise prices into the stratosphere.

In fact, the company struggled mightily in that decade to lower its prices even more—while facing its greatest competitive challenges (foreign and domestic), as well as a bedeviling technological challenge.

Running Out of Oil?

In the mid-1880s, Standard executives, like many others in the industry, feared that the world would run out of oil for refining. As late as 1885, there were no significant, well-known oil deposits in America outside of northwest Pennsylvania, and those appeared to be drying up. In 1885, the state geologist of Pennsylvania declared that “the amazing exhibition of oil” for the past quarter century had been only “a temporary and vanishing phenomenon—one which young men will live to see come to its natural end.”63 Some executives at Standard even suggested, of all things, that Standard Oil exit the oil business.

Others did not feel this desperation but did wonder where new oil could possibly come from; Pennsylvania was the only known oil source in America, and prospecting technology was still primitive. In 1885, when top executive John Archbold was told of oil deposits in Oklahoma, he said that the chances of finding a large oil field there “are at least one hundred to one against it” and that if he was wrong, “I’ll drink every gallon produced west of the Mississippi!”64

Rockefeller, however, having seen expectations of an oil apocalypse defied again and again in different parts of Pennsylvania, not only remained in the refining business; in a crucial vertical integration involving enormous risk, he also entered Standard Oil into the business of exploration and production.

Happily, by 1887, Standard’s new exploration and production division, along with other oil producers, found an abundant oil supply in Lima, Ohio. But there was a problem: The oil was virtually useless.

Supply-Side Strategy

All crude oil is not created equal—different kinds contain different fractions of potential petroleum products, as well as other elements that can make it harder or easier to refine. The oil discovered in Lima was the worst oil known to man. Its kerosene content was lower than Pennsylvania oil, and the kerosene that could be produced did not burn well, depositing large amounts of soot in any house it was burned in. Worse, due to high sulfur content, the oil emitted a skunk-like odor (it came to be called “skunk oil”). [Read more →]

September 1, 2011   2 Comments

Vindicating Capitalism: The Real History of the Standard Oil Company (Part III: The Missing Context of Standard’s Rise to Supremacy)

[Editor Note: This five-part series by Mr. Epstein, originally published in The Objective Standard, revisits the Standard Oil Trust controversy on this the 100th anniversary of the breakup of the Trust. Part I reviewed the flawed textbook interpretation of Rockefeller's accomplishment; Part II sketched the rise of Standard Oil and defended the free-market practice of rebating.

The 1870s was a decade of gigantic growth for the Standard Oil Company. In 1870, it was refining fifteen hundred barrels per day—a huge amount for the time. By January 1871, it had achieved a 10 percent market share, making it the largest player in the industry. By 1873, it had one-third of the market share, was refining ten thousand barrels a day and had acquired twenty-one of the twenty-six other firms in Cleveland. By the end of the decade, it had achieved a 90 percent market share.

Such figures are used as ammunition by those who believe in the dangers of acquisitions and high market share. These critics believe that Standard’s growth and its ability to acquire so many companies so quickly “must have” come from  some sort of “anticompetitive” misconduct—and they point to Standard Oil’s participation in two cartels during the early 1870s as evidence of Rockefeller’s market malice.

But the growing success of Standard did not flow from these attempted cartels—neither of which Standard initiated, and both of which failed miserably in very short order—but from the company’s enormous productive superiority to its competitors, and from the market conditions whose groundwork had been laid in the 1860s. Without understanding these conditions, one cannot understand Rockefeller’s exceptionally rapid rise.

Recall that in 1870 kerosene cost twenty-six cents a gallon, while three-fourths of the refining industry was losing money. A major cause of this was that refining capacity was at 12 million barrels a year, while there were only 5 million barrels to refine,46 a disparity that had an upward effect on the price of the crude that refiners purchased—and a downward effect on the price of the refined oil they sold.

Rationalizing Surplus Capacity

On November 8, 1871, a writer for the Titusville Herald estimated that “at present rates the loss to the refiner, on the average, is seventy-five cents per barrel.”47 Rockefeller’s firm, which was engineered to drastically lower production costs, could profit with such prices; few other firms could. [Read more →]

August 31, 2011   1 Comment

The Real History of the Standard Oil Company (Part II: The Phenom)

[Editor Note: This five-part series by Mr. Epstein, originally published in The Objective Standard, revisits the Standard Oil Trust controversy in this the 100th anniversary of the breakup of the Trust. Part I yesterday reviewed the flawed textbook interpretation of Rockefeller's accomplishment.

The Standard story begins during the U.S. Civil War. In 1863, the first railroad line was built connecting the city of Cleveland to the Oil Regions in Pennsylvania, where virtually all American oil came from. Clevelanders quickly took the opportunity to refine oil—as had the residents of the Oil Regions, Pittsburgh, New York, and Baltimore. Cleveland had the disadvantage of being one hundred miles22 from the oil fields but the advantage of having far cheaper prices for materials and land (Oil Regions real estate had become extremely expensive), plus proximity to the Erie Canal for shipping.23

John D. Changes Industry

At this time, Rockefeller was running a successful merchant business with his partner, Maurice Clark, when a local man named Samuel Andrews approached the two. A talented amateur chemist, Andrews sought their investment in a refinery.

After investigating the industry, Rockefeller convinced Clark that they should invest four thousand dollars.24  Rockefeller was attracted to the substantial—and then stable—profits of the refining industry, in contrast to the production industry, which alternated between incredible booms and busts. (When producers struck a “gusher,” whole towns were built up to the height of 1860s luxury; when they dried up, those towns faded into abject poverty.) He was not, however, impressed with the efficiency with which refiners ran their operations. He believed he could do better.

And he did—immediately. Instead of setting up a shanty refinery, Rockefeller invested enough to create the largest refinery in Cleveland: Excelsior Works. From the beginning, he encouraged Andrews to expand and improve the refinery, which soon produced 505 barrels a day,25 as compared to some refineries in the Oil Regions that produced as few as five barrels a day.26

Additionally, in a highly profitable act of foresight, Rockefeller carefully bought the land for his refinery in a place from which it would be easy to ship by railroad and by water, thus putting shippers in competition for his business; his competitors simply placed their refineries near the new Cleveland rail line and took for granted that it would be their means of transportation.27

A Real Businessman

Rockefeller’s business background made him well-suited to run a highly efficient firm. His first interest in business had been accounting—the art of measuring profit and loss (i.e., economic efficiency). Rockefeller’s first job had been as an assistant bookkeeper, and for his entire career he revered the practice of careful financial record-keeping.

“For Rockefeller,” writes Ron Chernow, “ledgers were sacred books that guided decisions and saved one from fallible emotion. They gauged performance, exposed fraud, and ferreted out hidden inefficiencies.”28 [Read more →]

August 30, 2011   3 Comments

Vindicating Capitalism: The Real History of the Standard Oil Company (Part I: The Fallacious Textbook Story)

[Author’s Note: This year marks the 100th anniversary of the Supreme Court ruling that found Standard Oil guilty of violating the Sherman Antitrust Act. As punishment, the world’s largest and most successful oil company was broken into 34 pieces.

Ever since, Standard Oil has served as the textbook example of why we need antitrust law--in the business world in general and in the energy business in particular. The Court’s decision affirmed a popular account of Standard Oil’s success, first made famous by journalists Henry Demarest Lloyd and Ida Tarbell. In the absence of antitrust laws, the story goes, Standard attained a 90% share of the oil-refining market through unfair and destructive practices such as preferential railroad rebates and “predatory pricing”; Standard then leveraged its unfair advantages to eliminate competition, control the market, and dictate prices.

Within the oil and electricity industries in particular, the spectre of a coercive monopoly developing in the absence of government intervention was used to justify coercive, monopolistic behavior by the government in the “common good,” be it by the Texas Railroad Commission or by government electrical utilities. This article, originally published in The Objective Standard, challenges the mythology of the Standard Oil case and, more broadly, the notion that a coercive monopoly can arise in the absence of government intervention. By implication, it illustrates that there is nothing standing in the way of a truly free, competitive energy market--an energy market free of antitrust law.]

Who were we that we should succeed where so many others failed? Of course, there was something wrong, some dark, evil mystery, or we never should have succeeded!1

—John D. Rockefeller

In 1881, The Atlantic magazine published Henry Demarest Lloyd’s essay “The Story of a Great Monopoly”—the first in-depth account of one of the most infamous stories in the history of capitalism: the “monopolization” of the oil refining market by the Standard Oil Company and its leader, John D. Rockefeller. “Very few of the forty millions of people in the United States who burn kerosene,” Lloyd wrote,

know that its production, manufacture, and export, its price at home and abroad, have been controlled for years by a single corporation—the Standard Oil Company. . . .

The Standard produces only one fiftieth or sixtieth of our petroleum, but dictates the price of all, and refines nine tenths. This corporation has driven into bankruptcy, or out of business, or into union with itself, all the petroleum refineries of the country except five in New York, and a few of little consequence in Western Pennsylvania. . . . the means by which they achieved monopoly was by conspiracy with the railroads. . . .

[Rockefeller] effected secret arrangements with the Pennsylvania, the New York Central, the Erie, and the Atlantic and Great Western. . . . After the Standard had used the rebate to crush out the other refiners, who were its competitors in the purchase of petroleum at the wells, it became the only buyer, and dictated the price. It began by paying more than cost for crude oil, and selling refined oil for less than cost. It has ended by making us pay what it pleases for kerosene. . . .2

Many similar accounts followed Lloyd’s—the most definitive being Ida Tarbell’s 1904 History of the Standard Oil Company, ranked by a survey of leading journalists as one of the five greatest works of journalism in the 20th century.3Lloyd’s, Tarbell’s, and other works differ widely in their depth and details, but all tell the same essential story—one that remains with us to this day.

Prior to Rockefeller’s rise to dominance in the early 1870s, the story goes, the oil refining market was highly competitive, with numerous small, enterprising “independent refiners” competing harmoniously with each other so that their customers got kerosene at reasonable prices while they made a nice living. Ida Tarbell presents an inspiring depiction of the early refiners.

Life ran swift and ruddy and joyous in these men. They were still young, most of them under forty, and they looked forward with all the eagerness of the young who have just learned their powers, to years of struggle and development. . . . They would meet their own needs. They would bring the oil refining to the region where it belonged. They would make their towns the most beautiful in the world. There was nothing too good for them, nothing they did not hope and dare.4

“But suddenly,” Tarbell laments, “at the very heyday of this confidence, a big hand [Rockefeller’s] reached out from nobody knew where, to steal their conquest and throttle their future. The suddenness and the blackness of the assault on their business stirred to the bottom their manhood and their sense of fair play. . . .”5

Driven by insatiable greed and pursuing his firm’s self-interest above all else, the story goes, Rockefeller conspired to obtain an unfair advantage over his competitors through secret, preferential rebate contracts (discounts) with the railroads that shipped oil. By dramatically and unfairly lowering his costs, he slashed prices to the point that he could make a profit while his competitors had to take losses to compete. Sometimes he went even further, engaging in “predatory pricing”: lowering prices so much that Standard took a small, temporary loss (which it could survive given its pile of cash) while his competitors took a bankrupting loss.

These “anticompetitive” practices of rebates and “predatory pricing,” the story continues, forced competitors to sell their operations to Rockefeller—their only alternative to going out of business. It was as if he was holding a gun to their heads—and the “crime” only grew as Rockefeller acquired more and more companies, enabling him, in turn, to extract ever steeper rebates from the railroads, which further enabled him to prey on new competitors with unmatchable prices. This continued until Rockefeller acquired an unchallengeable monopoly in the industry, one with the “power” to banish future competition at will and to dictate prices to suppliers (such as crude oil producers) and consumers, who had no alternative refiner to turn to.

The Shared Narrative

Pick a modern history or economics textbook at random and you are likely to see some variant of the Lloyd/Tarbell narrative being taken for granted. [Read more →]

August 29, 2011   11 Comments

Standard Oil: A Centennial Evaluation (Part IV: A free market, not political company)

[Ed. note: This post is taken from Robert Bradley's conclusion in chapter 18 of Oil, Gas and Government: The U.S. Experience. In this series, Part I summarized the manifold contributions of John D. Rockefeller to a fledgling, powerhouse industry; Part II critically interpreted rebates and other 'unfair' practices of Rockefeller's Trust; and Part III critically reviewed other complaints about unfair practices against Standard Oil.]

The Standard Oil Trust of John D. Rockefeller qualifies as a free market company, not a political one. The major mistake of Standard Oil in its distinguished history was not a failing of economic performance. It was underestimating the need to present information to explain to the public and critics the virtues of integration and scale economies, particularly in petroleum. (This was an intellectual problem of critics too–see the Appendix below.)

By following an explicit policy of secrecy until the late 1880s, Standard allowed opponents to get the upper hand in a public debate that for Standard would worsen at almost every turn, culminating in the 1911 Supreme Court dissolution decree.

Successful consumer service was considered by the company as its best strategy; it was not understood that competitors would be dissatisfied by the very fact that the public was so well served by Standard Oil. Given the precedent of intervention at all government levels, offense would have been the best defense.

Prior to the onslaught of state antitrust activity, political action by Standard was occasional and defensive. Eminent-domain rights, tailored to the needs of Standard’s pipeline competitors, and rate regulation of company pipeline and storage facilities, prompted Standard’s entrance into state politics in the 1880s in Pennsylvania, Ohio, Maryland, and elsewhere to financially support friendly politicians. In the late 1890s, federal politics became important to Standard, and company pesident John Archbold made large contributions to favored candidates until a 1907 law prohibited corporate political contributions.

By this time, Standard regularly spoke for the public record, but it was too late. Numerically powerful producer interests, who blamed their cyclical difficulties on Standard, joined by hard-pressed independent refiners and marketers, inspired muckraking journalism that nudged the public to the “little man’s” side.

Ida Tarbell’s standard of goodness was not superior consumer service but “the right to do an independent business” and “free and equal transportation” for all. The idea that consumers decide the structure and form of business and that in a free market less efficient firms – which she realized existed in the independent sector – must conform or perish had no part in her ethics, understanding or sympathy. [Read more →]

May 20, 2011   No Comments

Standard Oil: A Centennial Evaluation (Part III: Monopoly, Monopoly Profits, Subterfuge, and Obstructionism Reconsidered)

[Ed. note: This post, taken from Robert Bradley's Oil, Gas and Government: The U.S. Experience, rebutes the textbook criticisms of the business practices and economic consequences of the Standard Oil Trust. Part I summarized the manifold contributions of John D. Rockefeller to a fledgling, powerhouse industry. Part II provided a critical interpretation of rebate and other 'unfair' practices of Rockefeller's Trust. (Documentation for this post can be found on pp. 1099–1103.)]

If Standard is labeled a monopoly because of its large market share, a liberal application of the “single seller” criterion, it should be recognized that outside of oil tariffs that Standard neither wanted nor needed, Standard was a free-market, not a governmental, monopoly. Standard had to continually offer quality products at competitive prices to gain and keep its dominant market share. Lewis Galantiere observed with puzzlement that “this monopolist always produced as if he had competitors,” incognizant of the fact that without domestic barriers to entry (such as restrictive charters or siting permits), competition is omnipresent whatever the number and size of individual firms. This is because entrepreneurial ideas, awaiting fruition with the emergence of profit opportunities, can never be monopolized.

Standard Oil had competitors throughout its history–and increasingly so in the period of its antitrust troubles. In 1904, Standard’s twenty-three refineries, although claiming over 80 percent of the market, competed against seventy-five independents. By 1908, the number of independent refineries swelled to 125; three years later, the total was 147.

Potential entrants were virtually as important as actual entrants. In the 1880s and 1890s, Standard’s efficient performance kept would-be competitors on the sidelines and encouraged consolidation. This resulted from a competitive process entirely consistent with the market virtue of lowest cost provision of goods and services. There was also substitute competition; Standard’s kerosene had to compete with coal gas and electricity in the all-important illuminant market. As John Chamberlain stated:

Buyers always liked the company’s product – they proved by rushing to substitute petroleum kerosene for the old coal-oil and whale-oil illuminants. And buyers did not have any particular reason to complain of Standard’s pricing policy; not only did kerosene cost less than older fluids, but it had to meet the competition of the Welsbach gas burner and Mr. Edison’s carbon-filament electric light bulb. Standard could not have imposed a lighting monopoly even if it had tried. [Read more →]

May 18, 2011   No Comments

Standard Oil: A Centennial Evaluation (Part II: ‘Unfair’ practices and rebates reconsidered)

[Ed. note: This post, taken from Robert Bradley's Oil, Gas and Government: The U.S. Experience, rebutes the textbook criticisms of the business practices and economic consequences of the Standard Oil Trust. Part I yesterday summarized the manifold contributions of John D. Rockefeller to a fledgling, powerhouse industry. (Documentation for this post can be found on pp. 1094–1099.)]

Critics of Standard Oil, while conceding many of the aforementioned points about how Standard Oil advanced consumer service and resource efficiencies, might accuse the author of painting the picture with only bright colors. What about the other side of Standard’s drive to power? Did the ends justify the means – preferential treatment from third parties over competitors, monopsony power to purchase crude at prices detrimental to producers, predatory pricing to eliminate rivals and raise prices, and excess profits gained at the expense of consumers?

And what about land right-of-way obstructionism, buying into rivals to tame competition, establishing bogus companies, and spying on competitors? If these practices were legal, were they ethical? These points are considered below except for the monopsony argument, which was rebutted in chapter 14 of Oil, Gas, and Government.

It is worth noting at the outset that the complaints did not originate from consumers but from special interests within the industry. The critics were independent (non-Standard) producers, refiners, and marketers and sympathetic academicians and journalists who often had ulterior motives for their views.

Rebates

Price differentiation and individualized bargaining are essential aspects of competition. This is particularly true with railroads and other industries with relatively high fixed costs and low variable costs. Prices vary widely in such instances because incremental business covers at least variable costs. The railway industry in Standard’s day was very rivalrous, and railroads attempted to maximize revenue in each unique situation.

Before railroad interests passed protective legislation to discourage rebates (see chapter 11), the industry custom was to set book rates that were discounted for special customers who provided steady, high-volume business, Standard was the prototype special customer. Rebates off the book rate were, in Rockefeller’s words, “the railroads’ method of business.”

As part of the competitive process, discounts were often kept secret and paid after the fact as rebates. Railroads did not desire to trigger open price wars, and customers preferred to keep their rivals guessing. Whether the rebate was money returned from a book price (rebates) or money received from competitors’ shipments (drawbacks) was academic; preferred customers received lower rates than less preferred customers. Shippers with such scale economies were thus able to cheapen goods for consumers. If discounts could be prohibited by law, railroad interests would gain instead.

Critics of rebates have swallowed the railroad-industry line that rebates were “cutthroat” and bad, and therefore Standard was wrong for asking and receiving them. But rebates are price discounts that qualifying shippers and their consumers are entitled to negotiate in a free market. Moreover, as Standard stressed, rebating did not originate with them; was widely used by other shippers, competitors included; and was stopped once it became illegal in 1887. Before rebates were replaced by regulatory-induced price cartelization, Standard’s ability to negotiate them must be favorably viewed if consumer welfare and the interest of the recipient company are placed above the special interest of less able competitors and the railroad industry.

The last word on rebates was stated by Rockefeller in his memoirs when he called an oft-quoted statement: “ ‘I am opposed on principal to the whole system of rebates and drawbacks – unless I am in it.’ “

Predatory Pricing

The most infamous practice associated with the Standard Trust, predatory pricing, was popularized by Henry DemarestLloyd, Ida Tarbell, and other critics. The charge was that in marketing and particularly in refining, Standard initiated price wars by selling at below cost to weaken competitors and buy them out at depressed prices. Then, with control of the market, prices could be raised to enjoy monopoly profits. This alleged practice attracted so much popular support and political attention that the Clayton Act extended anti-trust law to ban “predatory” price discrimination in 1914. [Read more →]

May 17, 2011   1 Comment

Standard Oil: A Centennial Evaluation (Part I: John D. Rockefeller’s entrepreneurial genius)

[Yesterday (May 15) was the 100th anniversary of the U.S. Supreme Court decision [Standard Oil Co. of New Jersey v. United States finding John D. Rockefeller's company guilty of restraint of trade and monopolizing the petroleum industry. The court’s remedy was to affirm a lower court decree effectively dividing Standard Oil into several competing firmsdissolution of Standard Oil. This post, taken from Robert Bradley's Oil, Gas and Government: The U.S. Experience, summarizes the manifold contributions of John D. Rockefeller to a fledgling, powerhouse industry. Documentation for the points and quotations below can be found on pp. 1089–1094.], 221 U.S. 1 (1911)]

A resume of the contributions of Standard Oil prior to its court-ordered dissolution in 1911 offers an illuminating glimpse into entrepreneurship, the market process, and consumer service therein.

Rockefeller and the management team at Standard Oil can be credited with accelerating the maturation of the kerosene age in petroleum. Their entrance in the 1870s found an infant industry prone to cyclical growth, undercapitalization, and coordination problems. Explained Williamson and Daum:

Lack of balance between various segments of the industry appeared to be chronic; crude production, refinery capacity and throughput, and market demand were rarely in equilibrium. First, production would outrun throughput by refineries; the manufacturing capacity would exceed either current crude production or the rate at which refined products could be absorbed by the market. These more or less continuous maladjustments were reflected in wide fluctuations in prices of crude and refined products.

Within the free-market environment, company and industry problems invited profitable solutions, and Rockefeller proved to be the right man at the right place and time. Standard strategically bypassed the unstable exploration and production phase, where drilling was risky and production often exceeded storage and demand capabilities, and concentrated instead on the manufacturing phase. Demand for refined products was solid and growing, and the lure of a big strike would keep the drillers busy; Rockefeller’s plan was to concentrate in the middle with storage, transportation, and refining to lower cost and add value to the oil. The refining phase, in particular, was in need of great improvement. Summarized John McLaurin:

The first refineries were exceedingly primitive and their processes simple. Much of the crude was wasted in refining, a business not financially successful as a rule until 1872, notwithstanding the high prices obtained. Methods of manufacture and transportation were expensive and inadequate. The product was of poor quality, emitting smoke and unpleasant odor and liable to explode on the slightest provocation…. Railroad-rates were excessive and irregular…. The cost of transportation and packages had been important factors in crippling the industry.

Rockefeller clearly recognized the “manifold economies,” to borrow biographer Allen Nevin’s term, associated with large size. Contracting in bulk lowered input prices and transportation rates. Diverse plant locations reduced the business risks of fire and explosion. Improvements in distillation technology steadily lowered unit costs. Integration into complementary phases (barrel making, pipelines, wagon production, storage, loading facilities, marketing) internalized profits and trimmed costs. By-products that other refiners treated as waste Rockefeller found uses for. Literally hundreds of by-products were distilled from each barrel of oil. Opportunities for efficient operation were discovered and implemented that set industry standards in favor of the consumer. [Read more →]

May 16, 2011   2 Comments