John D Rockefeller and the birth of the modern oil industry

John-D-Rockefeller-sen
John D. Rockefeller may have been unfairly maligned as a “robber baron”.

In his book The Age of Oil, oilman and historian Leonardo Maugeri said oil slipped abruptly into modern life via the back door. Prior to the industrial age, Mesopotamians used seeping surface oil for asphalt in roadbuilding and waterproofing and as a component in medicine. But it wasn’t until the 1850s that chemists conducted experiments to use oil as a cheap and flexible source of light. In 1854 Canadian Abraham Gesner patented Kerosene for “illumination or other purposes” and its use quickly spread around New York as a cheaper and safer alternative than existing illuminants.

Oil remained hard to get out of the ground until 1859 when Edwin Drake first used a drilling machine in Pennsylvania, adapted from earlier oil experiments at Baku, Azerbaijan. Drake built a wooden tower with a large steam-driven wheel around which he coiled a cable with an iron bit at the end. The rotation of the wheel raised the cable and when it fell back it excavated a hole. Drake drove a pipe down the hole which his men drilled inside so water and loose particles did not impede the iron bit from going deep into the ground.

Drake’s other innovation was to use the Pennsylvania 42-gallon (159 litres) whiskey barrel which would become the fundamental oil production measure still in use today. His early success attracted others to Western Pennsylvania, men (and they were mostly men) who were called wildcatters because they could hear the cries of wildcats in the isolated areas where they drilled for oil. Within two years the first oil refinery was in operation with exports shipped to London and after another four the first successful pipeline. The Black Gold Rush was on.

In the early days recurring gluts flooded the market pushing prices down and bankrupting many investors. Drake was not immune and ended his life in poverty. The dramatic roller-coaster rise of early oil prices was a source of annoyance to many and one man in particular was determined to fix the problem.

John D Rockefeller was a trained bookkeeper and trader who landed in the refinery business in Ohio in 1863. Rockefeller saw the “invisible hand” of the economy as the problem and was determined to put his own architecture on the industry by suppressing competition entirely. While he saw the wildcatting exploration business as too erratic to control, Rockefeller began to tackle the downstream processes of refining, transportation, pipelines and ships. In 1870 he founded Standard Oil in Cleveland where he decided to consolidate the entire refining business.

In February 1872 he launched the Cleveland Massacre, taking over 22 of 26 refining companies bringing almost the entire American refinery and oil service industries under his control. Those that came into Rockefeller’s tent were well rewarded for putting ceilings on their production whereas those who resisted were ruthlessly squeezed out. With the help of his partner Henry Flagler (who later developed Florida real estate in Miami and Palm Beach), Rockefeller negotiated secret deals with the railroad companies to obtain heavily discounted oil transport fees for guaranteed petroleum transport. Rockefeller even won a 25 percent fee for every non-Standard Oil barrel of oil the railroad carried.

The only hope for his rivals was to build up pipeline capacity, a technology that had to be developed from scratch. But even here, Standard Oil quickly leveraged off their industry strength to dominate by the 1880s. By then Rockefeller controlled 90 percent of US refineries and pipelines, owned most of the transport rolling stock and shipping tankers and the entire production of high-grade railway lubricant, all at a time when the US had 85 percent of the world crude production and refining.

His agents monitored the price of oil and new discoveries across America. If a competitor lowered the price of kerosene, Standard Oil would go even lower, while increasing the price elsewhere to compensate. Rockefeller’s empire was almost complete, held back only by the lack of US law for federal incorporation, making his operation fragmented. His response was the Standard Oil Trust established in 1882. Rockefeller established companies in each state Standard Oil operated. These companies transferred their shares to a Board of Trustees in New York which would allocate a proportional quantity of trustee certificates to each shareholder.

The Standard Oil Trust was kept hidden until 1889 and by then many other large companies had also established trusts. By then kerosene was the US’s largest manufactured export to the world and Rockefeller was the richest person on the planet. Yet competition was slowly emerging. The brothers of dynamite-inventor Alfred Nobel, Ludvig and Robert, were busy developing the Russian oil industry at Baku. With investment from the French Rothschilds, the Russians built a railroad to transfer kerosene from Baku to Batum (now Batumi) on the Black Sea, opening up a route to world markets.

Standard Oil tried the same tactics in Europe that were successful in America but Rothschilds launched a counter-offensive into Asia. They were helped by an English businessman Marcus Samuel who designed a new class of oil tanker capable of passing through the Suez Canal. This slashed costs compared to Standard’s Cape of Good Hope route and Samuel began building onshore terminals and storage tanks in key Asian ports.

Samuel’s emergence as a key player was cemented in 1897 as he reorganised his business into a new joint stock company which he named after his father’s shell box company, Shell Transport and Trading Company, simplified as Shell. Russian oil production surged above America’s by 1900 and the picture was complicated further by the discovery of oil in East Sumatra by the Royal Dutch Company. Marcus tried to organise a merger with the Dutch led by Henri Deterding. But Deterding out-manouevred Marcus insisting on a 60-40 split in his favour. Royal Dutch Shell came into being in 1907 but the two companies maintained separate status in The Hague and London, kept together only by Deterding’s force of will. They didn’t evolve into a single company until 2005.

A century earlier, the fulcrum of the oil world moved to Texas with enormous finds bringing the word “gusher” into the English language. New American companies rose to challenge Rockefeller’s dominance: the Texas Oil Company, Gulf Oil and Union Oil.  There was another threat in the political sphere. New president Theodore Roosevelt campaigned on an anti-trust platform. Though Rockefeller had retired in 1895 it was kept a secret and he was the most visible target of the “trustbusters”.  Rockefeller became the archetypal “robber baron” which was unfair as he kept the kerosene price low for the general public and had never turned swindling into a business practice.

But the pressure mounted on the railroads as “common carriers” to stop fee discrimination while the media used its growing power to shine a light into Rockefeller’s secretive life. The pressure finally told in 1911 when the US Supreme Court ordered the dismantling of Standard Oil into 30 independent companies. Several of what would later be called the “seven sisters” of world majors (along with Shell) emerged from the Ashes: Exxon (Standard Oil of New Jersey). Mobil (Standard Oil of New York), Chevron (Standard Oil of California) and Amoco (Standard Oil of Indiana).  The ruling ended Rockefeller’s reign of setting oil prices though did little to stop anti-competitive practices. While Rockefeller lived another four decades in quiet retirement as the symbol of 19th century capitalism, a new use beyond illumination would put oil at the heart of 20th century capitalism. The age of the internal combustion engine would change everything.

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