Rockefeller: The Creator of the Wealth Myth

Author: Zeng Meng
Publisher:
Publish Date: 2005-02-01
Features: Rockefeller attended several schools in his youth, the last one being a business school; he sometimes also worked on his family's farm (one of which was selling the chickens his mother raised). Later, he became a bookkeeper. In 1859, Edwin Drake, an unemployed train conductor, drilled oil in Titusville, Pennsylvania; Rockefeller and a partner named Maurice Clark opened a brokerage firm in Cleveland, Ohio. During the Civil War, the firm's business flourished, and Rockefeller began engaging in some railroad and real estate ventures while closely watching the rapid development of the booming oil industry. In reality, there was little hope, and most of it was lost. At that time, the price of oil fluctuated greatly. When drilling the first batch of Pennsylvania oilfields, crude oil was $20 per barrel, but when a large amount of oil entered the market, the price fell to 10 cents per barrel within two years. Soon after, the price rose again, and in 1869, it remained at about $7 per barrel, only to drop below $3 in 1870. Due to these reasons, Rockefeller felt that drilling for oil was not very worthwhile, as all you could get was a dry hole, or if successful, the crude oil was worthless and had to be refined into kerosene, which was rapidly becoming a popular artificial light source. Refining a barrel (42 gallons) of crude oil cost 30 cents, and in 1870, a gallon of kerosene sold for $1. It was clear that the key to the oil industry lay in refining: controlling the refiners would allow you to determine both the price of production and the price that sellers should pay. In 1863, Rockefeller, Clark, and his two brothers, along with chemist Samuel Andrews, formed the "Standard Oil Works," one of many refining firms in Cleveland. Rockefeller vigorously managed it, making the Standard Oil Works the largest refinery in the region. It refined 500 barrels of oil daily, but his partner was indecisive, so two years later, he bought out the entire ownership. To improve his position, Rockefeller borrowed heavily. Between 1865 and 1866, he bought 50 refineries in Cleveland and 80 in Pittsburgh. Some of Rockefeller's refineries were the most advanced and efficient in the oil industry, giving him significant cost advantages. Due to the large output of his factories, he had a good relationship with the railroads and controlled the stations in Cleveland. With this powerful position, he could secure capital from local banks. However, when buying a factory, he preferred stock transactions rather than direct purchases. Some competitors claimed they were forced to sell their stocks, but the facts showed that Rockefeller's prices, if not high, were reasonable. This was especially true for many refineries on the verge of bankruptcy. During the post-war economic depression, many factories did indeed go bankrupt, but a few fiercely competed with Rockefeller. To achieve further savings and make his products cheaper than those of these factories, he took several steps, similar to what Swift did in the meat industry, to achieve vertical integration in the production and sales process: buying timber reserves and finished oil barrels, selecting warehouses, and setting up a fleet. Additionally, he reorganized the company, forming a partnership with two other entrepreneurs, Henry Flagler and Samuel Andrews, in 1867. Three years later, it was renamed Standard Oil of New Jersey. The key to success in the oil industry—and indeed most industries—was controlling a critical process or department that depended on everything else, a point that Rockefeller was not the only one to recognize. The Pennsylvania Railroad monopolized the trains traveling between the oilfields and eastern ports, forcing Rockefeller to pay the rates demanded by the railroad when transporting his kerosene and other products to the eastern market. This situation was somewhat similar to what Swift encountered. The leaders of Standard Oil also made the same decision. Rockefeller and Flagler proposed to the New York Central Railroad that if the railroad could set very low rates for "Standard," they would abandon water transport forever and guarantee daily shipments of 60 carloads of oil. The railroad agreed, thus undermining the monopoly of the Pennsylvania Railroad. Rockefeller soon thought of a plan that would further increase his power. He formed some refineries into the "Southern Improvement Company," with transportation shared by the Pennsylvania, New York Central, and Erie railroads at a preferential rate of $2.4 per barrel; Standard Oil was excluded, with a rate of $1.9 per barrel; and railroads not members of the Eastern Railroad Association were also given rebates. This plan was never realized and was later declared illegal by the courts. In the 1870s, Standard Oil grew rapidly, continuing its exploration and consolidating its control over the oil industry. During this period, it emphasized frugality. Balancing accounts became a habit, with prices calculated to the third decimal place. He insisted on placing a financial statement detailing net worth on his desk every morning he came to work. To save on transportation costs, he began building pipelines. By 1876, Standard Oil owned pipelines stretching over 400 miles and a storage terminal capable of holding 1.5 million barrels of oil. When the Pennsylvania Railroad challenged the refining industry again in the late 1870s, Rockefeller crushed the then-largest company in the U.S. and then bought its refining equipment. By the 1880s, it was clear that Rockefeller could no longer ignore drilling and sales. The Pennsylvania oilfields were beginning to deplete, and the assets controlled by Standard Oil had exceeded $70 million. "Standard" had to ensure a steady supply of crude oil. Rockefeller bought several regional sales companies. His company had become known as the "octopus," with its influence spreading throughout the oil industry. Its products accounted for about 90% of the output of refineries, and it monopolized the prices of kerosene, lubricating oils, paraffin, naphtha, various solvents, and other products refined by "Standard" scientists and technicians from oil. However, Rockefeller did not want his empire to control the entire market. He understood that allowing smaller, less efficient competitors to handle the insignificant portion would force them to fight for survival during tough times, while Standard Oil could continue to devote almost all its energy to production, avoiding accusations of monopolization. As Rockefeller's oil empire grew, it became increasingly dangerous to control, so Flagler and Standard Oil's lawyer, Samuel Dodd, formed a trust in 1882. It owned 14 companies in full and a portion of 26 others, including Standard Oil of New Jersey, with a total capital estimated at $70 million. The trust established subsidiaries named "Standard" in New York, New Jersey, Ohio, and Pennsylvania, concentrating operations in their respective states. This structure was not only powerful but also striking, and its existence fueled the anti-trust movement of the time. Journalist Henry Demarest Lloyd wrote a complaint against the trust in his book "The Wealth of Nations," calling for its dissolution. "At the moment we are being killed by the sword in our own hands, we must control it, or possess it, or destroy it," Lloyd wrote. Rockefeller responded, "The American rose produces its magnificent beauty and fragrance, bringing joy to the beholder, but only at the cost of the early buds around it. The same is true in economic life. This is the law of nature and the way of the heavens." Lloyd's hope was realized: the Sherman Antitrust Act was passed in 1890. However, the trust underwent several changes, and Rockefeller continued to control the market into the early 20th century. This was a time of setback. In the mid-1880s, Standard Oil was developing oilfields in Ohio. Through the purchase of the Ohio Oil Company and the establishment of several new companies, the central Midwest became a major area of Standard Oil's domain. New exploration work was also underway in California and Texas, but the company's efforts in these regions were later halted, so whether there was much oil there was uncertain. The company had a director named John D. Archibald, who was hesitant, suggesting that all crude oil discovered west of the Mississippi be absorbed. Additionally, Texas had an anti-Standard Oil organization and its own antitrust laws. In 1894, Texas Governor James Hogg sued Standard Oil, even demanding that Rockefeller be extradited from New York to Texas for trial. This did not go anywhere. However, the difficulties Standard Oil faced in Texas showed that the company could not conduct any exploration work there. As a result, it lost the opportunity to discover what would become the largest oil source in U.S. history, a discovery that began with oil found in Spindletop in 1901. After that, new companies emerged, such as Gulf Oil and Texas Oil (later Texaco), and the businesses of other companies also expanded, including "Sun" and "Shell" Oil. Foreign competition also intensified. "Standard's" position in the oil industry was weakened. By 1911, its share in refining had dropped to 75%. Its competitors supplied one-third of the gasoline in the nation. "Standard" accounted for only 29% of production in the highly productive California oilfields, 10% of production along the Gulf Coast, and even in the once-major oil-producing central Midwest, it only accounted for 44% of oil production. Ironically, that same year, the anti-trust movement finally succeeded: the trust collapsed because it attempted to "drive others out of the oilfields and prevent them from doing business." This did not mean that Standard Oil collapsed or that Rockefeller's power was greatly weakened. One of its successor companies—Standard Oil of New Jersey—was the second-largest industrial enterprise in the U.S. (second only to U.S. Steel). Archibald succeeded Rockefeller as head of Standard Oil of New Jersey. Although he miscalculated the potential of crude oil in the West, he remained one of the shrewdest merchants in the oil industry. In fact, Rockefeller always considered cultivating talent his most important task. "The secret of Standard Oil's success," he claimed, "lies in having a group of people who work together sincerely from beginning to end." This was true almost from the start. In 1879, William H. Vanderbilt, head of the New York Central Railroad, praised the ability of Standard Oil's management team. "These people are much more capable than I am. They are highly motivated and very astute. In business, such a team of astute and capable people is rare. I have never encountered one." Besides Archibald and Flagler, there were Rockefeller's brother William, Henry H. Rogers, James M. Moffat, Charles Pratt, Oliver H. Payne, and others. These people formed a truly capable management team in the U.S. Rockefeller, with their help, became a pioneer in developing modern corporate organizations. Most of them served on the executive committee of "Standard," overseeing not only direct management but also strategic planning, information gathering, and analysis. Any expenditure over $5,000 and new construction costing more than $2,500 required approval from the committee, and even salary increases of more than $600 had to be approved by the committee. Clearly, this could no longer continue, as Rockefeller's empire was so vast that the committee eventually had to delegate some authority to middle-level management. Later, someone proposed that the structure of "Standard" was partly modeled after the Roman Catholic Church, but more importantly, Rockefeller and other industrial giants learned a lot about business practices from railroad companies, especially the Pennsylvania Railroad. Rockefeller was a miracle and a myth in the history of American and global oil. In just a few decades, he accumulated astonishing wealth, becoming a world-renowned tycoon, he founded the trust, which in turn shaped him. His pioneering and unique experiences set him apart from other wealthy figures. This book focuses on deciphering Rockefeller's two great weapons—perseverance and belief.