Standard Oil: The Gem of the Titan

This article is about a company which had a humungous impact on the world we live in today. But still, very few of us have even heard about this company. Curated its roots in the 1800s, this company was the first to introduce the concept of monopoly in the modern age of industrialization in the United States. The company being discussed here is Standard Oil. Established in the year 1863 by John D Rockefeller, son of a conman from Cleveland, Ohio, this company made history in various aspects that are still unknown to most of us.

As the oil rush began in America in 1859, Standard oil, contemporarily known as Rockefeller & Andrews, came into existence amongst the formation of multiple petroleum companies. What made this company unique was its position in the value chain of Petroleum business. While most of the companies focused on seizing more and more oil wells to extract oil, Mr Rockefeller had a totally different approach. He didn’t believe in luck and regarded the oil extraction business as comparatively risky and not worthwhile enough to pursue. On analyzing the production process of oil, it appeared to be a very inefficient and wasteful process to him. Thus, he started to look for a better way to make a business out of ‘oil’. On gaining a proper understanding of the science behind the oil business, he decided to enter into oil refining, thus bypassing the whole uncertainty of locating oil wells accurately. His belief was Gamblers dig for oil while businessmen refine it. The 24-year-old thus invested all his wealth, a sum of $4000, to establish an oil refinery.

But often, things don’t go as planned. The company reached the verge of bankruptcy in 1866. To save the company, Mr Rockefeller stroked a deal with Cornelius Vanderbilt, the then railroad magnate and the richest American, by securing competitive transport rates for his oil.

During this phase of the petroleum boom in the US, kerosene, which Standard Oil provided, had the most widespread use as a lighting source in households. But kerosene was earning a bad name due to numerous fire incidents being caused by it. Mr Rockefeller saw an opportunity in this chaos and then actually renamed the ‘Rockefeller & Andrews’ as ‘Standard Oil’ in 1870, with the name signifying the standard and stable quality of oil that the company provided. This proved to be an extremely successful marketing step. The name overcame the fears of the consumers and soon became one of the most sought-after products in the country.

Standard Oil then became the largest producer of refined Kerosene in the US. And the deal with Cornelius Vanderbilt made it possible. But soon, Standard Oil’s production outgrew the shipping capacity of Vanderbilt’s trains. Thus, Standard Oil stroke another deal, a better one, with Vanderbilt’s competitor. Now the whole railroad industry along with the two of its largest players was in the loop of Standard Oil. Having this huge competitive edge, Standard Oil went on a takeover spree and begin to buy out its competitors (voluntary or forced, whichever seemed possible). It’s 1872 takeover spree is recorded as “The Cleveland Massacre”. The intent was simply to name each refinery in the country under Standard Oil. It was a concept that no American had ever thought of executing. Today, it is called a monopoly.

Standard Oil’s motive was not just to expand the business but also to maximize profit. By the time, Standard Oil reached its peak in 1872, it controlled 90% of the American oil supply and became the country’s first monopoly, a concept unheard of and considered to be unachievable. At 33, Mr John D. Rockefeller was the richest and the most powerful man of the US.

This historic feat forced the major railroad companies to act in unison against Standard Oil which was acting on the divide and rule policy with them by being the only business provider to them and thus getting its oil transported at dirt cheap rates. Together, the railroad companies, led by Cornelius Vanderbilt pulled all the Rockefeller’s deal, leading Standard Oil to a halt with no supply of its oil to the market.

To counter this so-called act of war by the railroad companies, Standard Oil came up with a new, ambitious and risky project requiring huge investment to transport its oil. The plan was to spread a web of pipelines in the country for oil supply, cutting out the railroad companies altogether. The first phase of pipelines was 4000 miles long, connecting all of the country’s oil markets directly to Standard Oil Refineries. In the quest to survive market forces, Standard Oil revolutionized the way oil was transported.

Till then, the railroad was the country’s largest industry. But the steps by Standard Oil in 1873, took most of the railroad players out of business, resulting in the bankruptcy of 1/3rd of country’s 364 railroad companies. It was the worst crash in the short American history, resulting in the American stock market getting shut down for 10 straight days.

As the competitor oil companies continued to collapse, Standard Oil bought each of them at prices next to nothing. By the time depression got over, Standard Oil was the country’s largest corporation with 98% of the US’s oil business. By this time, Mr Rockefeller was worth $150 mn or $225 bn in terms of 2012.

But this ruthless growth didn’t go unheard in the political corridors of the US. The then US President, Theodore Roosevelt filed multiple lawsuits in 1906 under the Sherman Antitrust Act of 1890 against the unethical business practices of Standard Oil. During this time, Edison’s light bulb came into the market, reducing the demand for kerosene oil as a lighting source, the business still thrived with the increasing demand for oil as fuel for growing automobiles.

Finally, in 1911, following the Supreme Court's ruling, Standard Oil was broken into seven successor companies and 34 entities in total, considering all the holding and subsidiary companies, few of which like Chevron or Exxon Mobil which are even today, one of the largest oil companies of the world. By the time the Standard Oil was broken up in 1911, its market share had eroded to 64%. During this time, as per multiple estimates and adjustments of Rockefeller’s net worth to the current time ranges between $400 bn - $600 bn. One of the 34 split company, Exxon Mobil alone had a market capitalization of more than $500 bn in 2007-08.

Thus, it was a company that did the impossible in the modern age of industrialization. No company has been able to match the level of ingenuity, both in a positive as well as negative way, that Standard Oil and its owner had not only to create a business out of nowhere but also to make it the largest. Though Standard Oil reflected the gruesome side of growing capitalism, the indelible fact is that it was this company that set a benchmark of corporate success for the coming generations which still is unachievable.