The story
Founded by Henry Morrison Flagler, John D. Rockefeller, Samuel Andrews, Stephen V. Harkness and William Rockefeller in 1890.1
Founding and early years
Standard Oil's prehistory began in 1863, as an Ohio partnership formed by industrialist John D. Rockefeller, his brother William Rockefeller, Henry Flagler, chemist Samuel Andrews, silent partner Stephen V. Harkness, and Oliver Burr Jennings, who had married the sister of William Rockefeller's wife. In 1870, Rockefeller abolished the partnership and incorporated Standard Oil in Ohio. The company was established with $1 million in capital. Of the initial 10,000 shares, John D. Rockefeller received 2,667, Harkness received 1,334, William Rockefeller, Flagler, and Andrews received 1,333 each, Jennings received 1,000, and the firm of Rockefeller, Andrews & Flagler received 1,000. Rockefeller chose the "Standard Oil" name as a symbol of the reliable "standards" of quality and service that he envisioned for the nascent oil industry.
In the early years, John D. Rockefeller dominated the combine; he was the single most important figure in shaping the 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 cooperatively.
The company grew by increasing sales and through acquisitions. After purchasing competing firms, 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 Railroad, gave Rockefeller's firm a going rate of one cent per gallon or 42 cents per barrel—an effective 71% discount from its listed rates—in return for a promise to ship at least 60 carloads of oil daily and to handle loading and unloading on its own. Smaller companies decried such deals as unfair because they were not producing enough oil to qualify for discounts.
Standard's actions and secret transport deals helped its kerosene price to drop from 58 to 26 cents from 1865 to 1870. Rockefeller used the Erie Canal as a cheap alternative form of transportation—in the summer months when it was not frozen—to ship his refined oil from Cleveland to the industrialized Northeast. In the winter months, his options were the three trunk lines—the Erie Railroad and the New York Central Railroad to New York City, and the Pennsylvania Railroad to Pittsburgh and Philadelphia.
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 (in Texas, far from Standard Oil's base in the Midwest) 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.
South Improvement Company
In 1872, Rockefeller joined the South Improvement Company which would have allowed him to receive rebates for shipping and drawbacks on oil his competitors shipped. He successfully convinced refineries in Cleveland to sell their businesses to Standard Oil in exchange for cash or stock. But when this deal became known, competitors convinced the Pennsylvania Legislature to revoke South Improvement's charter. No oil was shipped under this arrangement. Using highly effective tactics, later widely criticized, it absorbed or destroyed most of its competition in Cleveland in less than two months and later throughout the northeastern United States.
Hepburn Committee
A. Barton Hepburn was directed by the New York State Legislature in 1879 to investigate the railroads' practice of giving rebates to their largest clients within the state. Merchants without ties to the oil industry had pressed for the hearings. Prior to the committee's investigation, few knew of the size of Standard Oil's control and influence on seemingly unaffiliated oil refineries and pipelines—Hawke (1980) cites that only a dozen or so within Standard Oil knew the extent of company operations.
The committee counsel, Simon Sterne, questioned representatives from the Erie Railroad and the New York Central Railroad and discovered that at least half of their long-haul traffic granted rebates and much of this traffic came from Standard Oil. Even independent companies not allied with Standard Oil confirmed receiving these rebates such as Simon Bernheimner, who was once a partner of the Olefin Oil Company. The committee then shifted its focus to Standard Oil's operations. Acme Oil Company president John Dustin Archbold denied that Acme was associated with Standard Oil; he then admitted to being a director of Standard Oil.
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The committee's final report scolded the railroads for their rebate policies and cited Standard Oil as an example. This scolding was largely moot to Standard Oil's interests since long-distance oil pipelines had become their preferred method of transportation.
Standard Oil Trust
In response to state laws that had the result of limiting the scale of companies, Rockefeller and his associates developed innovative ways of organizing to effectively manage their fast-growing enterprise. On January 2, 1882, they combined their disparate companies, spread across dozens of states, under a single group of trustees. By a secret agreement, the existing 37 stockholders conveyed their shares "in trust" to nine trustees: John and William Rockefeller, Oliver H. Payne, Charles Pratt, Henry Flagler, John D. Archbold, William G. Warden, Jabez Bostwick, and Benjamin Brewster.
"Whereas some state legislatures imposed special taxes on out-of-state corporations doing business in their states, other legislatures forbade corporations in their state from holding the stock of companies based elsewhere. (Legislators established such restrictions in the hope that they would force successful companies to incorporate—and thus pay taxes—in their state.)" Standard Oil's organizational concept proved so successful that other giant enterprises adopted this "trust" form.
By 1882, Rockefeller's top aide was Archbold, whom he left in control after disengaging from business to concentrate on philanthropy after 1896. Other notable principals of the company include Flagler (developer of the Florida East Coast Railway and resort cities) and Henry H. Rogers, who built the Virginian Railway.
In 1885, 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 Company of Ohio chartered the Standard Oil Co. of New Jersey to take advantage of New Jersey's more lenient corporate stock ownership laws.
Sherman Antitrust Act of 1890
In 1890, Congress overwhelmingly passed the Sherman Antitrust Act (Senate 51–1; House 242–0), a source of 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 Ohio Attorney General David K. Watson.
Earnings and dividends
From 1882 to 1906, Standard paid out $548,436,000 (equivalent to $1.43072×1010 in 2024) in dividends at a 65.4% payout ratio. The total net earnings from 1882 to 1906 amounted to $838,783,800 (equivalent to $2.18816×1010 in 2024), exceeding the dividends by $290,347,800, which was used for plant expansions.
1895–1913
In 1896, John Rockefeller retired from the Standard Oil Co. of New Jersey, the holding company of the group, but remained president and a major shareholder. Vice-president Archbold took a large part in the running of the firm. In 1904 Standard Oil controlled 91% of oil refinement and 85% of final sales in the United States. State and federal laws sought to counter this development with antitrust laws. In 1911, the U.S. Justice Department sued the group under the federal antitrust law and ordered its breakup into 39 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 bought the company that invented and produced Vaseline, the Chesebrough Manufacturing Co., which was a Standard company from 1908 to 1911.
One of the original "Muckrakers," Ida M. Tarbell, was an American author and journalist whose father was an oil producer whose business had failed because of Rockefeller's business dealings. After extensive interviews with Rogers—a sympathetic senior executive of Standard Oil—Tarbell's investigations of Standard Oil fueled growing public attacks on Standard Oil and 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 Co.
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 Co. of New York City). They made large purchases of stock in U.S. Steel, Amalgamated Copper, and even Corn Products Refining Co.
China
Standard Oil's production increased so rapidly it soon exceeded U.S. demand, and the company began viewing export markets. In the 1890s, Standard Oil began marketing kerosene to China's large population of close to 400 million as lamp fuel. For its Chinese trademark and brand, Standard Oil adopted the name Mei Foo (Chinese: 美孚) as a transliteration. Mei Foo became the name of the tin lamp that Standard Oil produced and gave away or sold cheaply to Chinese farmers, encouraging them to switch from vegetable oil to kerosene. The response was positive, sales boomed, and China became Standard Oil's largest market in Asia.
The North China Department of Socony (Standard Oil Company of New York) operated a subsidiary called Socony River and Coastal Fleet, North Coast Division, which became the North China Division of Stanvac (Standard Vacuum Oil Company) after that company was formed in 1933. To distribute its products, Standard Oil constructed storage tanks, canneries (bulk oil from large ocean tankers was re-packaged into 5-US-gallon (19 L; 4.2 imp gal) tins), warehouses, and offices in key Chinese cities. For inland distribution the company had motor tank trucks and railway tank cars, and for river navigation it had a fleet of low-draft steamers and other vessels.
Stanvac's North China Division, based in Shanghai, owned hundreds of vessels, including motor barges, steamers, launches, tugboats, and tankers. Prior to World War II, Stanvac was the largest single U.S. investment in Southeast Asia. Up to 13 tankers operated on the Yangtze River, the largest of which were Mei Ping (1,118 gross register tons (GRT)), Mei Hsia (1,048 GRT), and Mei An (934 GRT). All three were destroyed in the 1937 USS Panay incident. Mei An was launched in 1901 and was the first vessel in the fleet. Other vessels included Mei Chuen, Mei Foo, Mei Hung, Mei Kiang, Mei Lu, Mei Tan, Mei Su, Mei Hsia, Mei Ying, and Mei Yun. Mei Hsia, a tanker, was specially designed for river duty. It was built by New Engineering and Shipbuilding Works of Shanghai, who also built the 500-ton launch Mei Foo in 1912.
Mei Hsia ("Beautiful Gorges") was launched in 1926 and carried 350 tons of bulk oil in three holds, plus a forward cargo hold, and space between decks for carrying general cargo or packed oil. She had a length of 206 feet (63 m), a beam of 32 feet (9.8 m), a depth of 10 feet 6 inches (3.2 m), and had a bulletproof wheelhouse. Mei Ping ("Beautiful Tranquility"), launched in 1927, was designed off-shore, but assembled and finished in Shanghai. Its oil-fuel burners came from the U.S. and water-tube boilers came from England.
Middle East
Standard Oil and Socony-Vacuum Oil Company became partners in providing markets for the oil reserves in the Middle East. In 1906, Socony (later Mobil) opened its first fuel terminals in Alexandria. It explored in Palestine before World War I broke out but ran into conflict with the local authorities.
Monopoly charges and antitrust legislation
By 1890, Standard Oil controlled 88% of the refined oil flowed in the United States. Ohio successfully sued Standard, compelling the dissolution of the trust in 1892. In response, Standard simply separated 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. As a result, the Standard Oil Trust, based at 26 Broadway in New York, was legally reborn as a holding company in 1899: the Standard Oil Co. of New Jersey (SOCNJ). This company held stock in 41 others, which controlled other companies, which in turn controlled yet other companies. According to Daniel Yergin in his Pulitzer Prize-winning The Prize: The Epic Quest for Oil, Money, and Power (1990), 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, of which 55% was exported around the world. After 1900, it did not try to force competitors out of business by selling at a loss. The federal Commissioner of Corporations studied Standard's operations from the period of 1904 to 1906 and concluded that "beyond question... the dominant position of the Standard Oil Co. 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 in the sale of the refined petroleum products".
Because of competition from other firms, their market share gradually eroded to 70% by 1906 which was the year when the antitrust case was filed against Standard. Standard's market share was 64% by 1911 when Standard was ordered broken up. At least 147 refining companies were competing with Standard including Gulf, Texaco, and Shell.
In 1909, the U.S. Justice Department sued Standard under federal antitrust 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 had taken place over the preceding four years:
The general result of the investigation has been to disclose the existence of numerous and flagrant discriminations by the railroads on behalf of the Standard Oil Co. 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.
Prosecutors 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 Co., 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 Co. 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 Co. 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, Section II. It ordered Standard to break up into 39 independent companies with different boards of directors, the biggest two of the companies being Standard Oil of New Jersey (which became Exxon) and Standard Oil of New York (which became Mobil).
Standard president John D. 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. The dissolution had actually propelled Rockefeller's personal wealth.
From Wikipedia’s article on Standard Oil, shared under CC BY-SA 4.0.3