A Brief History of Oil: The Titan

More than any other man, John D. Rockefeller changed the face of American business. His focus on cost cutting, cash flow and balance sheet strength, combined with his unbridled ambition to control not only every level of oil production at his company, but indeed the entire oil industry itself, wrote the playbook by which all multinational corporations operate today.

Rockefeller began his empire first as a produce shipping firm trading wheat, pork and other commodities. Eventually it began trading oil after establishing its own refinery. Sensing the potential in the business, Rockefeller bought out his partner at age 26 to become the sole owner of Cleveland’s largest refinery.

As Rockefeller began building his empire, he differed from his competitors in several key ways by:

1)   Maintaining a large cash reserve at all times

2)   Lowering costs by bringing various stages of production “in house” (a process now called vertical integration).

3)   Pursuing a massive vision based on his foresight

As mentioned earlier, oil prices were extremely volatile in the first decades after Drake’s drilling discovery. As a result of this, many oil refiners went from feast to famine along with prices. Not Rockefeller. He always maintained a sizable cash reserve to continue operations and, more importantly, to buy up competitors who were less-prepared and entering bankruptcy during the bust times. In this fashion he was able to aggressively expand his company to insure he had even more assets in place for when next boom arrived.

However, it was Rockefeller’s focus on cost cutting that proved the most revolutionary. An intensely organized man with an almost inhuman focus on details, he noted with disdain that many of his costs were outside his company’s control.  He sought to change this, moving much of his needed supplies and distribution processes in-house, introducing the idea of vertical integration in the process.

While most other refiners simply focused on refining, Rockefeller’s firm owned the timber real estate needed to make barrels, the tank cars needed to transport refined oil, the warehouses needed to store his tank cars, and even the boats needed to transport the oil across the Hudson river.

So while his competitors had to pay whatever the producers or distributors charged, Rockefeller minimized his costs by simply controlling these portions of the oil business himself. Because of this, he was able to destroy his competitors when it came to pricing. And he often did so.

The typical Rockefeller acquisition went as follows. His company, Standard Oil, would dispatch several diplomats (none of whom claimed to work for Standard) to a leading refiner in a given market. Initially, the diplomats would offer to acquire the firm. If the firm refused, Standard would cut its prices dramatically in the firm’s market, forcing the firm to lose money until it gave in and joined Rockefeller’s empire.

Because Standard was shipping so much oil, it could demand lower, bulk prices from transport companies, providing it with yet MORE leverage to use against its competitors. The benefits of size didn’t end there either. Standard also demanded “drawbacks” from shipping companies: in this scenario the shipping company paid Standard a percentage of the revenues it generated by shipping its competitors’ products.

In other words, Rockefeller’s Standard operated much like the mafia, demanding a slice of the revenues the shipping companies generated regardless of who owned the oil that was being shipped.

By the time he was in his 40s, Rockefeller WAS the oil industry with of 80-85% of all oil sold in the US coming from Standard in one form or another. Daniel Yergin, in The Prize, noted that by the time it was forced to break up, Standard:

§  Transported 80% of all oil produced from the major Oil Regions (Indiana, Ohio, and Pennsylvania).

§  Owned more than 50% of all tank cars in the US.

§  Refined more than 75% of all oil in the US.

§  Marketed more than 80% of all kerosene in the US.

§  Accounted for more than 80% of all Kerosene exports.

§  Controlled 78 steamers and 19 sailing vessels.

§  Sold over 90% of all railroad lubricating oils.

The company was so massive, that when then Supreme Court ordered it be broken up, the smallerpieces produced Exxon, Mobil, Chevron, Amoco, Conoco, and the American arm of BP.

And thus was born the beginning of the modern oil industry.

Due to space constraints, I must stop my overview of the oil industry’s history here.  If you are interested in learning more about the history of oil, particularly about developments abroad, I HIGHLY recommend reading Daniel Yergin’s The Prize. It’s a surprisingly easy read for a book that is 700+ pages in length.

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