Creator of the Rockefeller Wealth Myth: Interpretation of the Great Enterprise Series

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 also 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 around $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 material for artificial lighting. Refining one barrel (42 gallons) of crude oil cost 30 cents, and in 1870, one gallon of kerosene could sell for $1. It was clear that the key to the oil industry lay in refining: controlling the refiners would allow them to determine 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 a "Refining Company," one of many refining firms in Cleveland. Rockefeller vigorously managed the company, making it the largest refiner 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 took on a lot of debt. In 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 brink of bankruptcy. Indeed, many factories did go bankrupt during the post-war economic depression, 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, aiming to achieve vertical integration in the entire process of production and sales: 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 Ohio. The key to success in the oil industry—indeed, most industries—was controlling a critical process or department that depended on everything else, something Rockefeller was not the only one to recognize. The Pennsylvania Railroad monopolized the trains running between the oilfields and eastern ports, forcing Rockefeller to pay the freight 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 freight rates for "Standard," they would abandon water transport 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 enhance his power. He formed some refineries into a "Southern Improvement Company," with cargo handled by three railroads—the Pennsylvania, New York Central, and Erie—offering preferential rates 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 also received 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 dominated the prices of kerosene, lubricating oils, paraffin, naphtha, various solvents, and other products refined from oil by Standard's scientists and technicians. 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 struggle for survival during tough times, while Standard Oil could continue to devote almost all its energy to production, avoiding accusations of monopoly control. As Rockefeller's oil empire grew, it became increasingly dangerous to control, so in 1882, Flagler and Standard's lawyer, Samuel Dodd, formed a trust. It owned 14 companies in full and a portion of 26 others, including Standard Oil of Ohio, 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 brilliance and fragrance, bringing joy to the observer, but only at the expense of the early buds around it. The same is true in economic life. This is the law of nature and reason." 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 buying the Ohio Oil Company and establishing several new companies, the central Midwest became a major area of Standard's domain. Some new exploration work was also done in California and Texas, but the company's efforts in these regions were later halted, so it was uncertain whether there was much oil there. The company had a director named John D. Archbold, who was hesitant, suggesting that all crude oil discovered west of the Mississippi be absorbed. Additionally, there was an anti-Standard Oil movement in Texas, which had 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, which began with the discovery of oil 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. In the highly productive California oilfields, Standard's share was only 29%, and in the Gulf Coast region, it was 10%. Even in the once-major oil-producing central Midwest, it accounted for only 44% of the oil production. Ironically, that same year, the anti-trust movement finally succeeded: the trust collapsed because it tried to "drive others out of the oilfields and prevent them from doing business." This did not mean 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). Archbold succeeded Rockefeller as head of Standard Oil of New Jersey. Although he made a mistake in estimating the 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." Almost from the very beginning, this was the case. In 1879, William H. Vanderbilt, head of the New York Central Railroad, praised the ability of Standard's management team. "These people are much more capable than I am. They are highly motivated and very astute. In business, it's rare to find such a team of both astute and capable people. I haven't encountered one like it." Besides Archbold and Flagler, there were Rockefeller's brother William, Henry H. Rogers, James Mooney, 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 collection, 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 grant some authority to middle-level management. Later, someone proposed that the structure of "Standard" was partly modeled after the Roman Catholic Church, but it was more accurate to say that Rockefeller and other industrial giants learned a lot about business methods from railroads, 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 one of the world's wealthiest men, he founded a trust, and the trust 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.