Standard Oil Company

Sources

Background. In the 1850s a new industry emerged when refiners discovered that refined petroleum (which up until that point had been bought chiefly for its supposed medicinal properties) made an ideal fuel for lamps. (It would not become important for fueling engines until the twentieth century.) Production boomed; wells sprang up as large oil fields were discovered in Pennsylvania and the Midwest; and hundreds of small firms sprouted. In the decades after the Civil War this buzzing, frenetic activity formed the backdrop for the emergence of a new way of organizing business on an unprecedented large scale: the business trust. The instrument that devised this innovation was the Standard Oil Company, led by John D. Rockefeller.

Growth. Rockefeller had amassed effective control over oil refining in Cleveland in the late 1860s and early 1870s (Cleveland being an important refining region) by promising railroads a regular flow of business in return for lower shipping rates. His competitors, unable to obtain the same rates, found themselves faced with the choice of being ruined or agreeing to be absorbed by Standard Oil (via stock exchanges). Rockefeller’s conquests, in turn, increased his leverage over the railroads and thereby magnified his advantages over remaining competitors. “If you don’t sell your property,” Rockefeller is reported to have warned one competitor, “it will be valueless because we have advantages of the railroads.” By 1872 Standard Oil controlled more than a quarter of the total daily capacity of the industry.

Early Organization and Challenges. At this stage the “company” in fact consisted of many smaller companies that held stock in each other, often secretly. Meanwhile in the nation, the various remaining refiners engaged in intense, cutthroat competition over the 1870s, overproducing and slashing into profits. Rockefeller tried to protect Standard’s position by promoting pools, or associations, among refiners: agreements to set prices, secure advantageous shipping rates, and allocate production quotas and profits. The most ambitious of these was the National Refiners Association, formed in August 1872. However, nonbinding agreements proved impossible to enforce and broke down repeatedly— “ropes of sand,” Rockefeller called them. Moreover, Standard found itself fending off challenges from the railroads, from the oil producers supplying the refiners, and (as Rockefeller’s tactics became more publicly known) from state and federai authorities. In 1879 a Pennsylvania grand jury indicted nine company officials for violating state antimonopoly laws.

Pipelines. The most serious challenge to Standard Oil carne from the oil producers (at this stage the company did not actually drill for oil; it merely refined it). In 1879 an association of producers completed the Tidewater Pipeline, running from oil fields in Bradford to the Reading Railroad at Williamsport, Pennsylvania. This innovation demonstrated that crude oil could be shipped cheaply over long distances by pipeline—much more cheaply than by rail, in fact. Standard Oil quickly responded by beginning construction of its own network of pipelines. However, at this point Rockefeller and his associates found that they needed a more formal way to structure their business. Before Tidewater, Standard Oil had made good profits refining oil in Cleveland and other points and shipping it by rail. But the cost-efficiency of pipeline transport made it imperative to ship crude oil to shipping points and refine it there. Standard Oil had already acquired refineries in New Jersey; now it would have to dismantle a good portion of its refining capacity in Cleveland and at other inland points and move operations closer to the ports. In order to accomplish this restructuring, the company needed to institute more centralized administrative machinery. Out of this challenge carne the famous, and infamous, Standard Oil Trust.

The Trust. The Standard Oil Trust Agreement, signed by Rockefeller and associated investors on 2 January 1882, set up the trust as the central holding agency conglomerating forty companies. In effect this new corporate structure authorized a board of trustees to manage the properties of corporations joining the trust on behalf of their stockholders. This structure—the first of its kind—permitted the trust to work around state laws that might restrict operations in any single state while partially centralizing control over the various companies that Standard Oil comprised. To govern the trust, the agreement established an executive committee and vested it with broad administrative powers over Standard’s various subsidiaries. The trustees promptly began reorganizing the business, moving the company’s headquarters to New York and setting up several important new subsidiaries—the Standard Oil Company of New York and what would become the company’s single most important individual company within the trust: the Standard Oil Company of New Jersey. By the mid 1880s the trust had moved into new headquarters at 26 Broadway in New York, manned by an extensive staff.

Expansion and Vertical Integration. Over the next few years the trust successfully concentrated refining in Cleveland (serving the domestic market), Philadelphia, and New York-New Jersey (where the company now located 45 percent of Standard’s output). During the mid 1880s the company expanded its pipeline network and centralized its purchasing under a wholly owned subsidiary, the Joseph Seep Agency. By the end of the decade it was expanding its operations into crude-oil production and at the same time tightening its marketing procedures. In other words, in its first decade the trust systematically expanded Standard’s scope of business, extending its control up and down the chain of oil extraction, manufacturing, and distribution. This vertical integration buttressed Standard’s dominance of the industry. And during the same period, the company expanded overseas, setting up its first foreign affiliate—the Anglo-American Oil Company Limited of London—in 1888. By 1899 Standard Oil controlled 90 to 95 percent of the oil refined in the United States.

Federal Legislation. The 1890 Sherman Anti-Trust Act was aimed directly at the structure that Standard Oil had set up, and in its wake the company faced a major legal assault. Within two years the Ohio Supreme Court ordered the trust to divest itself of Standard Oil of Ohio declaring in its ruling that “Monopolies have always been regarded as contrary to the spirit and policy of the common law.... A society in which a few men are the employers and the great body are merely employees or servants, is not the most desirable in a republic.” Standard Oil responded by shifting the core holding company to Standard Oil of New Jersey (in that state laws governing business combinations were looser) and restructuring and enlarging its other companies. By 1899 “Jersey” had become the sole holding company for all Standard interests. Company assets by the turn of the century had reached $300 million. Growth continued into the first decade of the twentieth century, as did hostile governmental scrutiny.

Sources

Allan Nevins, Study in Power: John D. Rockefeller, Industrialist and Philanthropist, 2 volumes (New York: Scribners, 1953);

Ida Tarbell, The History of the Standard Oil Company (New York: McClure, 1904);

Harold F. Williamson and Arnold R. Daum, The American Petroleum Industry: The Age of Illumination, 1859-1899 (Evanston, 111.: I Northwestern University Press, 1959)