Standard Oil Company

The Standard Oil Company was a dominant integrated oil producing, transporting, refining, and marketing company in the U.S., with worldwide operations. Established in 1870 and operating as a trust until it was convicted of crime in federal court, given a $29 million fine, and broken into three dozen smaller companies. The verdict was upheld by the United States Supreme Court in 1911. It had been one of the world's first and largest multinational corporations.

Standard Oil Refinery No. 1 in Cleveland, Ohio, 1899

Early years

Standard Oil began as an Ohio partnership formed by the well-known industrialist 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, the company absorbed or destroyed most of its competition in Cleveland, Ohio; and later throughout the northeastern United States, putting numerous small corporations out of business.

In the early years, John D. Rockefeller dominated the combine, for he was the single most important figure in shaping the new oil industry. He quickly distributed power and the tasks of policy formation to a system of committees, although always retaining the largest shareholding in the company. Authority was centralized in the company's main office in Cleveland, yet within that office decisions were arrived at in a cooperative manner. 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 rapidly expanding 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 "antitrust" laws.

In 1907 the Company was convicted of violating the Elkins ant-rebate law and fined $29 million. 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 thirty-four 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, but, as he owned a quarter of all the outstanding shares of the many resultant companies, whose post-dissolution share value mostly doubled, he emerged from the dissolution even more wealthy; the richest man in the world.

The off-shoot companies form the core (or Seven Sisters) 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.

Business strategy of Standard Oil

Standard Oil's market position had been established through an emphasis on efficiency and responsibility. While most companies dumped gasoline (this being before the automobile) in rivers, Standard used it to fuel the company's own machines. Where gigantic mountains of heavy waste grew by other companies' refineries, Rockefeller found ways to market and sell these waste products, creating the first synthetic competitor for beeswax, as well as acquiring the company that invented and produced Vaseline, the Chesebrough Manufacturing Company, which was a Standard company only from 1908 until 1911.

As the company grew larger through more effective business practices, it developed other strongly competitive strategies, including a systematic program of offering to purchase competitors. After purchasing them, Rockefeller shut down the ones he believed to be inefficient while keeping the others. In a seminal deal, in 1868, the Lake Shore Railroad, a part of the New York Central, gave Rockefeller's firm a $0.25 cents/bbl. (71%) discount off of its listed rates in return for a promise to ship at least 60 carloads of oil daily and to handle the loading and unloading on its own, a huge competitive advantage.

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.

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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.

State action

The state of 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 relinquishing control of that company. Eventually, the state of New Jersey changed its incorporation laws to allow a single company to hold shares in other companies in any other state. Hence, in 1899, the Standard Oil Trust, based at 26 Broadway in New York, was legally reborn as a holding company - a corporation known as the Standard Oil Company of New Jersey (SONJ), which held stock in forty-one other companies, which controlled other companies, which in turn controlled yet other companies, in a conglomerate that was seen by the public as all-pervasive, controlled by a select group of directors, and completely unaccountable.

Singer (2002) narrates how in November 1894, a Texas grand jury indicted Henry Clay Pierce (the president of Waters-Pierce Oil Company), numerous company employees and Standard Oil executives, including John D. Rockefeller himself, of conspiring to monopolize the oil trade in Texas. This was Texas's first litigation to enforce its 1889 antitrust law. The Waters-Pierce company was found guilty and barred from doing business in Texas in 1900. However, it quickly reorganized as a new company, got a new permit to do business in Texas, and continued operations until 1906, when it faced a fresh round of lawsuits. Henry Clay Pierce himself was tried for perjury; he was found not guilty, once again Waters-Pierce was ousted from doing business in Texas. Singer shows that that attacking Waters-Pierce, and Standard Oil, was a popular technique for Texas politicians to win votes but also a way to make money from fines and legal fees.

1890-1911

In 1890, Standard Oil of Ohio moved its headquarters to 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. In 1890, with Standard in mind, Congress passed the Sherman Antitrust Act to make criminal every contract, scheme, deal, or conspiracy to restrain trade. Much legal wrangling focused on the phrase "restraint of trade." The Standard Oil group quickly attracted attention from antitrust authorities leading to a lawsuit filed by then Ohio Attorney General David K. Watson.

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Ida M. Tarbell, one of the original "muckraker" journalists was the daughter of an oil producer whose business had failed due to Standard. Following extensive interviews with a senior executive of Standard Oil, Henry H. Rogers, Tarbell's investigations of Standard Oil fueled growing public attacks on Standard Oil and on monopolies 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.

Business operations

Standard paid out in dividends during 1882 to 1906 in the amount of $548,436,000, at 65.4% payout ratio. A large part of the profits was not distributed 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 $290,347,800. The latter amount was used for plant expansion.

The Standard Oil Trust itself was controlled by a small group of families. Rockefeller himself stated in 1910: "I think it is true that the Pratt family, the Payne-Whitney family (which were one, as all the stock came from Colonel Payne), the Harkness-Flagler family (which came into the Company together) and the Rockefeller family controlled a majority of the stock during all the history of the Company up to the present time".

These families 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 U.S. Steel, Amalgamated Copper, and even Corn Products Refining Company.

Anti-trust litigation, and breakup of the company

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 kerosene, of which 55% was exported around 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. 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." Gradually, its market share fell to 64% by 1911. Standard did not try to monopolize the exploration and pumping of oil (its share in 1911 was 11%). 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. Vice-president John D. Archbold then took a large part in the running of the firm.

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:

"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:

"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:

"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 monopolistic customers, but lowered them to hurt competitors, often disguising its illegal actions by using bogus supposedly "independent" companies it controlled.

"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."

On May 15, 1911, the United States Supreme Court ordered the breakup of the Standard Oil group of companies into thirty-four independent companies, each with its own board of directors. The Court declared the group to be an "unreasonable" monopoly under the Sherman Antitrust Act.

Legacy

Whether the existence of Standard Oil was beneficial is a matter of some controversy. 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".

The Sherman Act prohibits the restraint of trade. Defenders of Standard Oil insist that the company did not restrain trade, they were simply superior competitors. The federal courts ruled otherwise.

Many 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.

Bibliography

• Akin, Edward N. Flagler: Rockefeller Partner and Florida Baron. (1992). online edition
• Bringhurst, Bruce. Antitrust and the Oil Monopoly: The Standard Oil Cases, 1890-1911. , 1979.
• Chernow, Ron. Titan: The Life of John D. Rockefeller, Sr. , 1998. well-regarded biography
• Droz, R.V. Whatever Happened to Standard Oil?, 2004. Retrieved June 25 2005.
• Folsom, Jr., Burton W. John D. Rockefeller and the Oil Industry from The Myth of the Robber Barons. , 2003.
• Hidy, Ralph W. and Muriel E. Hidy. History of Standard Oil Company (New Jersey : Pioneering in Big Business 1882-1911). New York: Ayer Co. Publishing, 1987.
• Jones; Eliot. The Trust Problem in the United States 1922. Chapter 5; online edition
• Klein, Henry H. Dynastic America and Those Who Own It. New York: Kessinger Publishing, [1921] Reprint, 2003.
• Knowlton, Evelyn H. and George S. Gibb. History of Standard Oil Company: Resurgent Years 1911-1927. 1956.
• Larson, Henrietta M., Evelyn H. Knowlton and Charles S. Popple. New Horizons 1927 - 1950 (History of Standard Oil Company (New Jersey), Volume 3), 1971.
• Latham, Earl ed. John D. Rockefeller: Robber Baron or Industrial Statesman?, 1949. Primary and secondary sources. online edition
• 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. online edition
• Montague, Gilbert Holland. The Rise And Progress of the Standard Oil Company. (1902) online edition
• Nevins, Allan. John D. Rockefeller: The Heroic Age of American Enterprise. 2 vols. New York: Charles Scribner's Sons, 1940.; revised edition Study In Power: John D. Rockefeller, Industrialist and Philanthropist. 2 vols. 1953.
• Nowell, Gregory P. Mercantile States and the World Oil Cartel, 1900-1939. 1994
• Singer, Jonathan W. Broken Trusts: The Texas Attorney General versus the Oil Industry, 1889-1909. 2002. 344 pp.
• Tarbell, Ida M. The History of the Standard Oil Company, 1904. The famous original expose in cClure's Magazine
• Tarbell, Ida. The History of the Standard Oil Company (1904) full-length book
• Wall, Bennett H. Growth in a Changing Environment: A History of Standard Oil Company (New Jersey), Exxon Corporation, 1950-1975. New York: Harpercollins, 1989.
• Williamson, Harold F. and Arnold R. Daum. The American Petroleum Industry: The Age of Illumination, 1859-1899, 1959: vol 2, American Petroleum Industry: the Age of Energy 1899-1959, 1964. The standard history of the oil industry. online edition of vol 1
• Yergin, Daniel. The Prize: The Epic Quest for Oil, Money, and Power. 1991.

Primary sources

• United States Bureau of Corporations, Statement of the Commissioner of Corporations in Answer to the Allegations of the Standard Oil Company (1907) online edition at Google

External links

• The Dismantling of The Standard Oil Trust
• Standard Oil Company of California. Whatever happened to Standard Oil?, 1980. Retrieved June 25 2005.
• Educate Yourself- Standard Oil -- Part I
• Google Books: Dynastic America and Those Who Own It, 2003 {1921}, by Henry H. Klein
• David K. Watson
• Standard Oil Trust original Stock Certificate signed by John. D. Rockefeller, William Rockefeller, Henry M. Flagler and Jabez Abel Bostwick - 1882
• Whatever happened to Standard Oil?: Pre-1911 and Post-1911 - Timeline of the various subsidiaries
• Standard Oil around the World: Post-1911