Standard Oil was a predominant integrated oil producing, transporting, refining, and marketing company. Established in 1870, it operated as a major company trust and was one of the world's first and largest multinational corporations until it was dissolved by the United States Supreme Court in 1911. John D. Rockefeller was a founder, dominant partner and major shareholder, and the company made him a billionaire and eventually the world's richest man.
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. In 1870 Rockefeller incorporated Standard Oil in Ohio. Using highly effective tactics, later widely criticized, it absorbed or destroyed most of its competition in Cleveland in less than two months in 1872 and later throughout the northeastern United States, putting numerous corporations out of business.
In the early years, John 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, but always remained the largest shareholder.
Authority was centralized in the company's main office in Cleveland, but decisions in the office were made in a cooperative way.
In response to state laws trying to limit the scale of companies, Rockefeller and his partners developed innovative ways of organizing, to effectively manage their fast growing 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.
As the company grew through effective business practices, it developed other strongly competitive strategies, including a systematic program of offering to purchase competitors. After purchasing them, Rockefeller shut down those he believed to be inefficient and kept 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 per 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 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 and receive drawbacks on oil his competitors shipped. But when this deal became known, 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 tried to build an oil pipeline to overcome Standard's virtual boycott of its competitors. In response, the railroad company at Rockefeller's direction denied the association 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 pump the oil manually into the pipeline on the other side. When Rockefeller learned of this tactic, he instructed the railway company to park empty rail cars across the line, thereby preventing the carts from crossing his property.
Standard's actions and secret transport deals helped its kerosene price to drop from 58 to 26 cents from 1865 to
1870. Competitors disliked the company's business practices, but consumers liked the lower 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 had no power to negotiate those prices.
In 1890, Standard Oil of Ohio moved its headquarters from Cleveland to its permanent headquarters at 26 Broadway in New York
City. Concurrently, the trustees of Standard Oil of Ohio chartered the Standard Oil Company of New Jersey (SOCNJ) to take advantages of New Jersey's more lenient corporate stock ownership laws. SOCNJ eventually became one of many important companies that dominated key markets, such as steel and the railroads.
Also in 1890, Congress passed the Sherman Antitrust Act — the source of all American anti-monopoly laws. The law forbade every contract, scheme, deal, or conspiracy to restrain trade, though the phrase "restraint of trade" remained subjective. The Standard Oil group quickly attracted attention from antitrust authorities leading to a lawsuit filed by then Ohio Attorney General David K. Watson.
From 1882 to 1906, Standard paid out $548,436,000 in dividends at 65.4% payout ratio. As is common practice in business, a fraction of the profits was put back into the business, rather than being distributed to stockholders. The total net earnings from 1882 to 1906 amounted to $838,783,800, exceeding the dividends by $290,347,800. The latter amount was used for plant expansion.
1895 - 1920
In 1897, John Rockefeller retired from the Standard Oil Company of New Jersey, the holding company of the group, but remained a
major shareholder. Vice-president John Dustin Archbold took a large part in the running of the firm. At the same time, state and federal laws sought to counter this development with "antitrust" laws. In 1911, the US Justice Department sued the group under the
federal antitrust law and ordered its breakup into 34 companies.
Standard Oil's market position was initially established through an emphasis on efficiency and responsibility. While most companies dumped gasoline in rivers (this was before the automobile was popular), Standard used it to fuel its machines. While other companies' refineries piled mountains of heavy waste, Rockefeller found ways to sell it. For example, Standard created the first synthetic competitor for beeswax and bought the company that invented and produced Vaseline, the Chesebrough Manufacturing Company, which was a Standard company only from 1908 until 1911.
One of the original "muckrakers" was Ida M. Tarbell, an American author and journalist. Her father was an oil producer whose
business had failed due to Rockefeller's business dealings. After extensive interviews with a sympathetic 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 published in 19 parts in McClure's magazine from November 1902 to October 1904, then in
1904 as the book The History of the Standard Oil Company.
The Standard Oil Trust was controlled by a small group of families. Rockefeller 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 US Steel, Amalgamated Copper, and even Corn Products Refining Company.
Monopoly charges, anti-trust litigation and breakup.
By 1890, Standard Oil controlled 88% of the refined oil flows in the United States. The state of Ohio successfully sued Standard,
compelling the dissolution of the trust in 1892. But Standard only separated off Standard Oil of Ohio and kept control of it. Eventually, the state of New Jersey changed its incorporation laws to allow a company to hold shares in other companies in any state. So, in 1899, the Standard Oil Trust, based at 26 Broadway in New York, was legally reborn as a holding company, the Standard Oil Company of New Jersey (SOCNJ), which held stock in 41 other companies, which controlled other companies, which in turn controlled yet other companies. This conglomerate was seen by the public as all-pervasive, controlled by a select group of directors, and completely unaccountable.
In 1904, Standard controlled 91% of production and 85% of final sales. Most of its output was kerosene (not animal fat), of which
55% was exported around the world. Standard's plants were about as cost efficient as competitors'. After 1900 it did not try to force competitors out of business by underpricing them. The federal Commissioner of Corporations concluded that beyond question,
Standard's 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." Standard's market share fell gradually to 64% by 1911. It did not try to monopolize the exploration and pumping of oil (its share in 1911 was 11%).
In 1909, the US Department of Justice sued Standard under federal anti-trust law, the Sherman Antitrust Act of 1890, for sustaining
a monopoly and restraining interstate commerce by:"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 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 railroadsin 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 US Supreme Court upheld the lower court judgment and declared the Standard Oil group to be an "unreasonable" monopoly under the Sherman Antitrust Act. It ordered Standard to break up into 34 independent companies with different boards of directors.
Standard's president, John Rockefeller, had long since retired from any management role. But, as he owned a quarter of the shares of the resultant companies, and those share values mostly doubled, he emerged from the dissolution as the richest man in the world.