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A BOON FOR CONSUMERS.
Some of the oil producers were unhappy, but
American consumers were pleased that Rockefeller
was selling cheap oil. Before 1870, only the rich could
afford whale oil and candles. The rest had to go to
bed early to save money. By the 1870s, with the drop
in the price of kerosene, middle and working class
people all over the nation could afford the one cent
an hour that it cost to light their homes at night.
Working and reading became after-dark activities
new to most Americans in the 1870s.
Rockefeller quickly learned that he couldn’t please
everyone by making cheap oil. He pleased no one,
though, when he briefly turned to political
entrepreneurship in 1872. He joined a pool called the
South Improvement Company and it turned out to be
one of the biggest mistakes in his life.
The scheme was hatched by Tom Scott of the
Pennsylvania Railroad. Scott was nervous about low
oil prices and falling railroad rates. He thought that if
the large refiners and railroads got together they
could artificially fix high prices for themselves.
Rockefeller decided to join because he would get not
only large rebates, but also drawbacks, which were
discounts on that oil which his competitors, not he,
shipped. The small producers and refiners bitterly
attacked Rockefeller and forced the Pennsylvania
Legislature to revoke the charter of the South
Improvement Company. No oil was ever shipped
under this pool, but Rockefeller got bad publicity
from it and later admitted that he had been wrong.
At first, the idea of a pool appealed to Rockefeller
because it might stop the glut, the waste, the
inefficiency, and the fluctuating prices of oil. The
South Improvement Company showed him that this
would not work, so he turned to market
entrepreneurship instead. He decided to become the
biggest and best refiner in the world. First, he put his
chemists to work trying to extract even more from
each barrel of crude. More important, he tried to
integrate Standard Oil vertically and horizontally by
getting dozens of other refiners to join him.
Rockefeller bought their plants and talent; he gave
the owners cash or stock in Standard Oil.
From Rockefeller’s standpoint, a few large vertically
integrated oil companies could survive and prosper,
but dozens of smaller companies could not. Improve
or perish was Rockefeller’s approach. “We will take
your burden,” Rockefeller said. “We will utilize your
ability; we will give you representation; we will all
unite together and build a substantial structure on
the basis of cooperation,” Many oil men rejected
Rockefeller’s offer, but dozens of others all over
America sold out to Standard Oil.
When they did, Rockefeller simply shut down the
inefficient companies and used what he needed from
the good ones. Officers Oliver Payne, H. H. Rogers,
and President John Archbold came to Standard Oil
from these merged finns.
Buying out competitors was a tricky business.
Rockefeller’s approach was to pay what the property
was worth at the time he bought it. Outmoded
equipment was worth little, but good personnel and
even good will were worth a lot. Rockefeller had a
tendency to be generous because he wanted the
future good will of his new partners and employees.
“He treated everybody fairly,” concluded one oil man.
“When we sold out he gave us a fair price. Some
refiners tried to impose on him and when they found
they could not do it, they abused him. I remember
one man whose refinery was worth $6,000, or at
most $8,000. His friends told him, ‘Mr. Rockefeller
ought to give you $100,000 for that.’ Of course Mr.
Rockefeller refused to pay more than the refinery was
worth, and the man . . . abused Mr. Rockefeller.”.
CUTTING COSTS.
Bigness was not Rockefeller’s real g0al. It was just a
means of cutting costs. During the 1870s, the price
of kerosene dropped from 26 to eight cents a gallon
and Rockefeller captured about 90 per cent of the
American market. This percentage remained steady
for years. Rockefeller never wanted to oust all of his
rivals, just the ones who were wasteful and those
who tarnished the whole trade by selling defective
oil. “Competitors we must have, we must have,” said
Rockefeller’s partner Charles Pratt. “If we absorb
them, be sure it will bring up another.”
Just as Rockefeller reached the top, many predicted
his demise. During the early 1880s, the entire oil
industry was in jeopardy. The Pennsylvania oil fields
were running dry and electricity was beginning to
compete with lamps for lighting homes. No one knew
about the oil fields out West, and few suspected that
the gasoline engine would be the power source of the
future. Meanwhile, the Russians had begun drilling
and selling theft abundant oil, and they raced to
capture Standard Oil’s foreign markets. Some
experts predicted the imminent death of the
American oil industry; even Standard Oil’s loyal
officers began selling some of their stock.
Rockefeller’s solution to these problems was to stake
the future of his company on new oil discoveries near
Lima, Ohio. Drillers found oil in this Ohio-Indiana
region in 1885, but they could not market it. It had a
sulphur base and stank like rotten eggs. Even
touching this oil meant a long, soapy bath or social
ostracism. No one wanted to sell or buy it and no city
even wanted it shipped there. Only Rockefeller
seemed interested in it. According to Joseph Seep,
chief oil buyer for Standard Oil:
Mr. Rockefeller went on buying leases in the Lima
field in spite of the coolness of the rest of the
directors, until he had accumulated more than 40
million barrels of that sul-phurous oil in tanks. He
must have invested millions of dollars in buying and
storing and holding the sour oil for two years, when
everyone else thought that it was no good.
Rockefeller had hired two chemists, Herman Frasch
and William Burton, to figure out how to purify the
oil; he counted on them to make it usable.
Rockefeller’s partners were skeptical, however, and
sought to stanch the flood of money invested in
tanks, pipelines, and land in the Lima area. They
“held up their hands in holy horror” at Rockefeller’s
gamble and even outvoted him at a meeting of
Standard’s Board of Directors. “Very well,
gentlemen,” said Rockefeller. “At my own personal
risk, I will put up the money to care for this product:
$2 million-S3 million, if necessary.” Rockefeller told
what then happened:
This ended the discussion, and we carried the Board
with us and we continued to use the funds of the
company in what was regarded as a very hazardous
investment of money. But we persevered, and two or
three of our practical men stood firmly with me and
constantly occupied themselves with the chemists
until at last, after millions of dollars had been
expended in the tankage and buying the oil and
constructing the pipelines and tank cars to draw it
away to the markets where we could sell it for fuel,
one of our German chemists cried “Eureka!” We . . .
at last found ourselves able to clarify the oil.
The “worthless” Lima oil that Rockefeller had
stockpiled suddenly became valuable; Standard Oil
would be able to supply cheap kerosene for years to
come. Rockefeller’s exploit had come none too soon:
the Russians struck oil at Baku, four square miles of
the deepest and richest oil land in the world. They
hired European experts to help Russia conquer the oil
markets of the world. In 1882, the year before Baku
oil was first exported, America refined 85 per cent of
the world’s oil; six years later this dropped to 53 per
cent. Since most of Standard’s oil was exported, and
since Standard accounted for 90 per cent of
America’s exported oil, the Baku threat had to be
met.