The Rise and Fall of Standard Oil

Standard Oil was the company John D. Rockefeller and his partners founded in Cleveland in 1870. Within ten years it held about 90% of US refining capacity, and on 15 May 1911 the US Supreme Court ordered it broken up. The forty-year story began with the buying of one city's refineries and ended with the biggest case in American antitrust law. Today's ExxonMobil and Chevron came out of its pieces.

1870Founding in a Scattered Industry

The company was set up on 10 January 1870 with $1 million in capital and 10,000 shares. Rockefeller was the largest partner with 2,667 shares, alongside his brother William, Henry Flagler, Samuel Andrews, Stephen Harkness and Oliver Jennings. The word "standard" in the name claimed a dependable product in a trade where kerosene quality was uncertain: refining was cheap to enter, output varied and oversupply kept pushing prices down. From its first day the company did about a tenth of the country's refining.^[1][2]

1872Taking Cleveland

The decisive move came in early 1872. In February freight rates suddenly jumped and the name South Improvement Company surfaced. Member refiners would get rebates on their own freight and a share of what rivals paid. About 3,000 people gathered at the Titusville opera house, Oil Creek producers stopped selling crude, and only about 70 of Standard's 1,200 Cleveland workers could keep working. The Pennsylvania legislature revoked the charter, and not one barrel moved under the scheme.^[2]

Amid that panic, Rockefeller went round Cleveland offering rivals cash or shares for their plants. Small refiners judged that they could not compete with a giant holding railroad rebates.

In under four months, 22 of his 26 rivals passed to Standard.

1870sCost: Barrels, Rail Cars and Kerosene

Part of the company's strength came from plain cost accounting. It made its own barrels in its own shops. It used tank cars in place of barrels in boxcars, and delivered kerosene to the door in horse-drawn tank wagons. Over the company's life the price of kerosene fell by about 80%. Consumers got cheap light, and rivals could not survive at that price.^[1][2]

1877-1879The Battle over Transport

Dominance in oil was won in transport. The test came in 1877. Empire Transportation, run by Joseph Potts, worked as the oil arm of the Pennsylvania Railroad. Potts feared his customers would fall into Standard's hands and began building refineries of his own. Rockefeller wanted no rival in refining. In March 1877 he shut his Pittsburgh refineries, and the railroad's oil traffic fell by about 65%.^[4]

In July the great railroad strike destroyed millions of dollars of the Pennsylvania Railroad's property. Its head, Tom Scott, could not hold out on two fronts. In October it was agreed to sell Empire to Standard for $3.5 million, and Standard took pipelines and rival refineries at a stroke.^[4]

Technology soon changed the game. In 1879 independent producers completed the Tidewater Pipe Line and moved crude outside the railroad monopoly. Standard first tried to block it, then did the same itself. The business logic of pipeline transport took shape in these years.^[1]

1882-1892The Trust and the First Legal Blow

As it grew, the company ran into a legal problem: a company chartered in one state could not then hold shares in a company in another. The lawyers' answer was the trust. On 2 January 1882, 41 partners handed their holdings to nine trustees in exchange for trust certificates, and the trustees ran 40 companies from one place. Rockefeller held 191,700 of the 700,000 shares, and the structure was valued at $70 million. Headquarters moved to 26 Broadway, New York, in 1885.^[1][2]

"Trust" soon became a word of American politics. New York's Hepburn Committee had recorded railroad rebates in 1879. In 1890 Congress passed the Sherman Act, 51 to 1 in the Senate and 242 to 0 in the House, when Standard controlled about 88% of the country's refined oil. The Ohio Supreme Court dissolved the trust on 21 March 1892. The assets were split into 20 companies on paper, with the same owners. After New Jersey changed its law, Standard Oil of New Jersey gathered them all back as a holding company in 1899.^[1]

1890sA Rival at Sea

Rockefeller had set up a separate New York firm for kerosene exports in 1866. Standard's kerosene went to Europe and Asia in cases and barrels on sailing ships, and its foreign rivals came from this front. Baku oil entered the market. The London merchant Marcus Samuel put the tanker Murex, carrying Russian kerosene, into service in 1892. The Suez Canal authorities had been turning tankers away for fear of fire, and Murex was designed to their safety terms. On 24 August 1892 she became the first bulk oil tanker through the Suez Canal, and Samuel undercut Standard in Asia. The venture later became the basis of Shell.^[6]

1901-1906The Cracks: Spindletop and Tarbell

The picture began to change at the turn of the century. On 10 January 1901 the Lucas well gushed at Spindletop, Texas, and companies such as Gulf and Texaco grew out of that field. In 1904 Standard still held 91% of refining and 85% of final sales, but its share was eroding.^[1]

Public opinion was shifting too. Ida Tarbell's series ran in McClure's from November 1902 to October 1904 and set out the company's methods with dates and figures for all to see. In 1906 the Roosevelt administration filed a federal case in Missouri under the Sherman Act.^[1]

1907-1911The Case and the Break-Up

In August 1907, in a separate case in Chicago, Judge Kenesaw Mountain Landis fined Standard Oil of Indiana $29,240,000 over rebates. The record fine was overturned on appeal on 22 July 1908.^[7] The main case went on, and a four-judge federal court found for the government in 1909.

The Supreme Court upheld this on 15 May 1911 in an opinion by Chief Justice Edward White. The ruling rested on the "rule of reason": the law barred only unreasonable restraints, not every one. The court held that Standard Oil had acted to shut out rivals, and ordered the holding company to separate its subsidiaries within six months.^[8] Rockefeller held 244,500 of the 983,383 shares. He took his share of the pieces. Shares in the new companies gained value in the following years, and the ruling that split the company made its owners richer.^[1][9]

After 1911Where the Pieces Are Today

The number of companies covered varies by source. The court document refers to 37 subsidiaries, the Rockefeller Archive Center to 38, Wikipedia to 39, and the common account says 34.^[1][8][9] The main pieces were these:

The mergers of BP with Amoco in 1998 and Exxon with Mobil in 1999 look like a partial undoing of the 1911 ruling. This time, though, most of the world's oil lies with state companies.^[10]

Frequently asked questions

What was Standard Oil?

Standard Oil was the oil company John D. Rockefeller founded in Ohio in 1870, broken up by a US Supreme Court ruling in 1911.

Why was Standard Oil broken up?

The US Supreme Court ruled that it had violated the Sherman Act by shutting out rivals, and ordered the holding company to separate its subsidiaries.

Does Standard Oil still exist?

No single company carries on under that name. The pieces broken up in 1911 live on, the largest being ExxonMobil and Chevron.

Which companies came from Standard Oil?

Large parts of today's ExxonMobil, Chevron and ConocoPhillips, along with the Amoco and Sohio branches of BP, came from Standard Oil's pieces.

Sources

1. Wikipedia. Standard Oil.
2. Daniel Yergin. The Prize: The Epic Quest for Oil, Money and Power, chapter 2, 1991.
3. Wikipedia. John D. Rockefeller.
4. Wikipedia. Empire Transportation Company.
5. Encyclopedia.com. Standard Oil Company.
6. Wikipedia. SS Murex; Marcus Samuel, 1st Viscount Bearsted.
7. Wikipedia. Kenesaw Mountain Landis.
8. US Supreme Court. Standard Oil Co. of New Jersey v. United States, 221 U.S. 1, 1911.
9. Rockefeller Archive Center. John D. Rockefeller Sr. biography.
10. Wikipedia. Successors of Standard Oil; History of ExxonMobil.