Standard Oil Company Is Incorporated Summary

  • Last updated on November 10, 2022

John D. Rockefeller and his associates turned their partnership into the joint-stock corporation Standard Oil, which planned to use stock to facilitate purchase of competitive refineries. Within two years, Standard controlled more than 30 percent of American refining capacity.

Summary of Event

On January 10, 1870, the oil refining partnership of Rockefeller, Andrews & Flagler dissolved and reconstituted itself as the Standard Oil Company, a joint-stock corporation organized under the laws of the state of Ohio. The founders did not intend to sell stock to the public but planned to use stock to pay for acquiring other refineries while maintaining control in the hands of John D. Rockefeller, William Rockefeller, and Henry M. Flagler. Standard Oil Petroleum;refining Rockefeller, John D. Rockefeller, William Petroleum;Standard Oil [kw]Standard Oil Company Is Incorporated (Jan. 10, 1870) [kw]Company Is Incorporated, Standard Oil (Jan. 10, 1870) [kw]Incorporated, Standard Oil Company Is (Jan. 10, 1870) [kw]Oil Company Is Incorporated, Standard (Jan. 10, 1870) Standard Oil Petroleum;refining Rockefeller, John D. Rockefeller, William Petroleum;Standard Oil [g]United States;Jan. 10, 1870: Standard Oil Company Is Incorporated[4420] [c]Business and labor;Jan. 10, 1870: Standard Oil Company Is Incorporated[4420] [c]Economics;Jan. 10, 1870: Standard Oil Company Is Incorporated[4420] Flagler, Henry M. Scott, Thomas A.

The new corporation, capitalized at $1,000,000, may already have been the largest oil company in the world. Its two great Cleveland refineries contained one-tenth of the petroleum refining Petroleum;refining capacity of the United States; it occupied sixty acres of land, operated its own large barrel-making factory and shipping facilities on the Great Lakes, owned tank cars and warehouses in the oil regions of Pennsylvania, and owned tanks and lighters in the Port of New York.

John D. Rockefeller, the dominant manager, early recognized the value of economies of scale and built the largest possible plants, stressing maximum efficiency. Standard became noted for the detailed records it kept of its operations and costs. (Rockefeller would boast in his memoirs of how much profit the company had accumulated over the years because he found a way to save one cent on the construction of each barrel.) Large-scale operation provided savings in the production of kerosene Kerosene;production of for lamps, then the predominant refinery product, and the residual matter that smaller refineries treated as waste could be profitably manufactured into lubricants, waxes, candles, and other salable by-products.

The company charter had one serious disadvantage: Ohio corporations were forbidden to own property outside the state, and Standard Oil had to use subterfuge and secrecy to cover its Pennsylvania and New York branches. Secrecy, however, could be a useful business tactic, and it became characteristic of Standard’s operations, permitting the corporation to engage in activities it preferred not to admit. Standard would be accused of having secret subsidiaries undersell competitors and drive them out of business, and of using unacknowledged firms to surreptitiously buy opponents who contemptuously rejected direct offers from Standard.

Because oil production was then limited to northwestern Pennsylvania, the oil-producing regions and Pittsburgh appeared to be the best locations for refineries. However, the cost of shipping to port cities was a major factor affecting refinery profitability at a time when the United States, the world’s largest producer of petroleum, Petroleum;refining exported two-thirds of the kerosene Kerosene it produced. The oil regions and Pittsburgh mostly depended on the Pennsylvania Railroad for access to ports. Cleveland refiners, served by three railroads—the New York Central-Lake Shore combination, the Erie, and the Pennsylvania—and with access to the Great Lakes and Erie Canal water route to New York City, successfully bargained for lower rates, despite their greater distance from markets.

John D. Rockefeller and his son, John D. Rockefeller, Jr., in 1915.

(Library of Congress)

Railroads competed for business by offering secret discounts from official rates to favored shippers. Although not explicitly illegal until the Interstate Commerce Interstate Commerce Act of 1887 Act of 1887, such rebates were never published or put in writing. Their existence, however, was common knowledge; all shippers strove for the biggest discounts they could get, but no one received as many or on as large a scale as Rockefeller and his associates. In 1868, Flagler Flagler, Henry M. won a rate of $1.65 per barrel to New York City, instead of the official $2.40, in exchange for agreeing to regularly ship sixty carloads per day. Critics of Standard claimed that insistence on secrecy proved rebates were unethical and immoral, even if not technically criminal, while defenders argued everybody did it and Standard deserved its special privileges because of the volume of traffic it generated.

In November, 1871, Rockefeller learned of a plan proposed by Thomas A. Scott Scott, Thomas A. of the Pennsylvania Railroad to end railroad price wars, raise rates to a profitable level, and guarantee each participating road a fair share of the oil traffic. Standard Oil, and the Pittsburgh and Philadelphia refiners also invited to join the South Improvement Company, would act as “eveners,” distributing their shipments among the three oil-carrying railroads according to fixed percentages. In return, the preferred refiners would receive not only a substantial rebate from the increased official rate but also a comparable drawback on shipments by nonmembers of the South Improvement Company. Allan Nevins, in his favorable biography of John D. Rockefeller, wrote, “Of all devices for the extinction of competition, this [the drawbacks] was the cruelest and most deadly yet conceived by any group of American industrialists.”

Although hesitant at first to join the scheme, Rockefeller and other Standard Oil officers took nine hundred of the two thousand shares issued by the South Improvement Company. On January 1, 1872, anticipating opportunities for expansion, the Standard Oil board increased its capitalization to $2.5 million, authorizing issuance of another $1.5 million in stock.

Word of the plot began to circulate in mid-February, 1872. When the railroads confirmed the rumors by announcing joint rate increases, producers and refiners in the oil regions reacted with fury, holding mass meetings, petitioning the state to revoke the South Improvement Company charter, and organizing a boycott Boycotts;and oil refineries[Oil refineries] of the offending refiners that cut off crude oil supplies to Standard, forcing it to drastically reduce production. Not until early April, after Rockefeller confirmed he was abandoning the scheme, did oil again flow to Cleveland.

Rockefeller always rejected assertions that the South Improvement device explained the growth of Standard Oil. He stressed that railroads, not Standard Oil, originated the idea, and because no oil ever shipped under the scheme, no one paid increased rates or suffered from drawbacks. Both assertions were correct, but Rockefeller carefully ignored the role played by fear of the South Improvement Company in his 1872 consolidation of Cleveland refineries, a move later called the Cleveland Massacre.

Between February 17, when rumors of the plan began to circulate, and March 28, when the railroads canceled their rate increases, Standard bought twenty-two of Cleveland’s twenty-six independent refineries. To reduce the glut of kerosene Kerosene on the market, Rockefeller planned to close most of the newly purchased refineries—only four of the acquired refineries were still operating at year’s end. Standard then appraised most plants at scrap value, usually a quarter or less of what they had cost to build. It is difficult to explain the willingness of owners to accept such harsh terms, absent the climate of fear created by knowledge of Standard Oil’s overwhelming competitive advantage under the South Improvement scheme.

Significance

John D. Rockefeller and his associates were planning growth when they incorporated on January 10, 1870, but no one, not even the ambitious Rockefeller, could have foreseen such spectacular success. Taking advantage of economic distress during the depression of 1873-1878, Standard expanded its ownership share to 90 percent. To evade restrictions in the Ohio charter, managers of newly acquired plants were told to pretend they were still independent.

As they reorganized the refining industry, the managers of Standard Oil continued a policy of operating only the largest, most efficient, and technologically advanced plants. They preferred stable prices and steady income to spectacular profits that would encourage newcomers to enter the field. Despite the negative effect on the fortunes of competitors, there is no evidence that Standard adversely affected the economy of the United States during the nineteenth century.

The massive size of the company, however, and its monopoly over a major sector of the economy aroused uneasiness among opinion makers; the secrecy with which Standard carried out its coups magnified into fear. Rockefeller’s stoic refusal to answer personal attacks enhanced the problem, as his very silence seemed both arrogant and proof he was hiding something. Standard Oil became the most hated corporation and Rockefeller the most reviled person in the country. Governmental investigations in the 1880’s revealed enough questionable activity to stimulate the nineteenth century antimonopoly, trust-busting movement that eventually led to a judicial order breaking up the corporation in 1911.

Further Reading
  • citation-type="booksimple"

    xlink:type="simple">Bradley, Robert L., Jr. Oil, Gas & Government: The U.S. Experience. 2 vols. Lanham, Md.: Rowman & Littlefield, 1996. Bradley, an economist, uses private enterprise ideology to defend Standard Oil Company against all criticisms, except that of poor public relations management.
  • citation-type="booksimple"

    xlink:type="simple">Chernow, Ron. Titan: The Life of John D. Rockefeller, Sr. New York: Random House, 1998. In this thoroughly researched biography, Chernow skeptically examines Rockefeller’s defensive explanations of the growth of Standard Oil.
  • citation-type="booksimple"

    xlink:type="simple">Nevins, Allan. Study in Power: John D. Rockefeller, Industrialist and Philanthropist. 2 vols. New York: Charles Scribner’s Sons, 1953. The first biographer to have access to company and family source material on Rockefeller, Nevins defends most of Standard Oil’s actions.
  • citation-type="booksimple"

    xlink:type="simple">Tarbell, Ida M. The History of the Standard Oil Company. 1904. Reprint. Edited by David M. Chalmers. New York: Dover, 2003. The classic Progressive period attack—abridged for this reprint—on Standard Oil condemns the company as unethical when not criminal, claiming it made ruthless use of South Improvement Company methods throughout its existence.
  • citation-type="booksimple"

    xlink:type="simple">Weinberg, Arthur, and Lila Weinberg, eds. The Muckrakers. Urbana: University of Illinois Press, 2001. Words from muckrakers, or critics, of corporate and other scandals and political corruption, including two articles by Ida Tarbell on the Standard Oil Company.
  • citation-type="booksimple"

    xlink:type="simple">Whitten, David O., and Bessie E. Whitten. The Birth of Big Business in the United States, 1860-1914: Commercial, Extractive, and Industrial Enterprise. Westport, Conn.: Praeger, 2006. An economic and standard history of major business in the United States before World War II. Includes a chapter on Standard Oil.

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