Oil is the world’s biggest and most pervasive business, the greatest of the great industries that arose in the last decades of the 19th century.
Of the top 20 companies, 7 are oil companies.
Oil is almost like money.
The Japanese attacked Pearl Harbor to protect their flank as they grabbed for the petroleum resources of the East Indies. Among Hitler’s most important strategic objectives in the invasion of the Soviet Union was the capture of the oil field in the Caucasus. But America’s predominance in oil proved decisive, and by the end of the war German and Japanese fuel tanks were empty.
With the end of the Cold War, a new world order is taking shape. Economic competition, regional struggles, and ethnic rivalries may replace ideology as the focus of international — and national — conflict, aided and abetted by the proliferation of modern weaponry. But whatever evolution of this new international order, oil will remain the strategic commodity, critical to national strategies and international politics.
In its first decades, the oil business provided an industrializing world with a product called by the made-up name of “kerosene” and known as the “new light.” At the end of the 19th century, Rockefeller had become the richest man in the US, mostly from the sale of kerosene. Gasoline was then only an almost useless by product, which sometimes managed to be sold for as much as 2 cents a gallon, when it could not be sold at all, was run out into rivers at night.
But was there enough rock oil available? Some said that it was only the “drippings” from underground coal seams. Certainly, a business could not be built from skimming oil stains off the surfaces of creeks or from wringing out oil-soaked rags.
The growth of this coal-oil business, wrote the editor of a trade journal, was proof of “the impetuous energy with which the American mind takes up any branch of industry that promises to pay well.”
Some of these seepages, along with escaping petroleum gases, burned continuously, providing the basis for fire worship in the Middle East.
When the banker James Townsend discussed their idea of drilling, many in New Haven derided it: “Oh Townsend, oil coming out of the ground, pumping oil out of the earth as you pump water? Nonsense! You’re crazy.”
James Townsend, the banker who had taken the greatest financial risk, was denied the credit he thought he deserved. “The whole plan was suggested by me, and my suggestions were carried out. The raising of money and sending it out was done by me. I do not say it egotistically, but only as a matter of truth, that if I had not done what I did in favor of developing Petroleum it would not have been developed at that time.” Yet he added, “the suffering and anxiety I experienced I would not repeat for a fortune.”
A coal-oil refiner visited the oil fields in 1860 to see the competition for himself. “If this business succeeds, mine is ruined.” He was right; by the end of 1860, the coal-oil refiners either were out of business or had moved quickly to turn themselves into crude-oil refiners.
In less than 2 years one memorable well generated $15K of profit for every $1 invested.
They had opened a turbulent era — a time of ingenuity and innovation, of deals and frauds, of fortunes made, fortunes lost, fortunes never made, of grueling hard work and bitter disappointments, and of astonishing growth.
Even then, at the age of 26, Rockefeller already made a forbidding impression. Tall and thin, he struck others as solitary, taciturn, remote, and ascetic. His unbending quietness — combined with the cold, piercing blue eyes set in angular face with a sharp chin — made people uneasy and fearful. Somehow, they felt, he could look right through them.
His father sought to teach him and his brothers mercantile skills early. “I trade with the boys,” the father was reported to have boasted, “and skin them and I just beat them every time I can. I want to make them sharp.”
As at no other time in American history, the business of America was truly business, and it was to this magnet that the energies, ambitions, and brains of young men were irresistibly drawn. They were caught up in what Rockefeller called “the Great Game” — the struggle to accomplish and build, and the drive to make money, both for its own sake and as a register of achievement. That game, played with new inventions and new techniques of organization, turned an agrarian republic, so recently torn by a bloody civil war, into the world’s greatest industrial power.
Rockefeller devoted himself to strengthening his business — by expanding facilities and striving to maintain and improve quality, and yet always controlling costs. He took the first steps toward integration, the process of bringing supply and distribution functions inside the organization, in order both to insulate the overall operation from the volatility of the market and to improve its competitive position. Rockefeller’s firm acquired its own tracts of land on which grew the white oak timber to make its own barrels; it also bought its own tank cars, and its own warehouses in NY, and its own boats on the Hudson River. At the beginning, Rockefeller also established another principle, which he religiously stuck to thereafter — to build up and maintain strong cash position. Already, before the end of the 1860s, he had built up sufficient financial resources so that his company would not have to depend upon the bankers, financiers, and speculators on whom the railways and other major industries had come to rely. The cash not only insulated the company from the violent busts and depressions that would drive competitors to the wall, but also enabled it to take advantage of such downturns.
One of Rockefeller’s great talents could already be discerned; he had a vision of where his company and the overall industry were going, and yet at the same time he persisted in commanding the critical daily details of its operations. “As I began my business life as a bookkeeper, I learned to have great respect for figures and facts, no matter how small they were.” Rockefeller immersed himself in all details and aspects of the business, even the unpleasant ones.
His bankruptcy left him with a deep-seated belief in the value of “cooperation” among producers and a no less deep-seated aversion to what he later called “unbridled competition.” Cooperation and combination, he had concluded, were necessary to minimize the risks in the uncertain world of capitalism. He had also learned another lesson; as he later said, “Keep your head above water and bet on the growth of your country.”
His relationship with the remote Rockefeller was to lead Flagler to another adage: “A friendship founded on business is better than a business founded on friendship.”
On those walks, when we were away from the office interruptions, we did our thinking, talking, and planning together.
Many years later, Rockefeller would look back on the early days and muse: “Who would ever have thought it would grow to such a size?”
It was at this anxious time that Rockefeller conceived his bold vision of consolidating nearly all oil refining into one giant combination. An actual combination would do what a mere pool or association could not: eliminate excess capacity, suppress wild fluctuations of price — and, indeed, save the business.
The idea was mine. The idea was persisted in, too, in spite of the opposition of some who became faint-hearted at the magnitude of the undertaking, as it constantly assumed larger proportions.
At one point, the price dropped to 48 cents a barrel — 3 cents less a barrel than housewives in the Oil Regions were paying for drinking water.
Many of the producers were speculators, others were farmers, and many of them, whatever their backgrounds, were highly individualistic and unlikely to take “ a long view” and think of the common good, even if a workable plan had presented itself. Rockefeller, with his passion for order, looked with revulsion at the chaos and scramble among the producers. “The Oil Regions,” he later said with acid disdain, “was a mining camp.” His target was the refiners.
Standard began, in each area, by attempting to buy out the leading refiners, the dominant firms. Rockefeller and his associates would approach their targets with deference, politeness, and flattery. They would demonstrate how profitable Standard Oil was compared with other refiners, many of which were struggling through hard times. Rockefeller himself would use all his own considerable talent for persuasion in the pursuit of a friendly acquisition. If all that failed, Standard would bring a tough competitor to heel by making him “feel sick” or, as Rockefeller put it, by giving him “a good sweating.” Standard would cut prices in that particular market, forcing the competitor to operate at a loss.
The Standard men, moving in great secrecy, operated through firms that appeared to be independent to the outside world, but had in fact become part of the Standard Group. Many refiners never that their local competitors, which were cutting prices and putting other pressures on them, were actually part of Rockefeller’s growing empire. Through all the phases of the campaign, the Standard men communicate in code. Rockefeller never wavered in his defense of the secrecy of his operations. “It is all too true. But I wonder what General of the Allies ever sends out a brass band in advance with orders to notify the enemy that on a certain day he will begin an attack?”
There was a more personal reason, as well. Rockefeller and his parters had begun to think about mortality and inheritance, and they had concluded that the death of one of them would likely lead, under the existing system, to confusion, controversy over values, litigation, and bitterness. A trust would get the ownership organized and clarified, with little left to future debate.
The focus on costs, sometimes calculated to the third decimal place, never wavered. “It has always been my rules in business to make everything count,” Rockefeller once said. Using its superior communications, the company took advantage of the arbitrage and played the spreads among prices in the Oil Regions, Cleveland, NY, and Philadelphia, as well as in Antwerp and elsewhere in Europe. The company also used an extraordinary system of corporate intelligence and espionage to keep track of market conditions and competitors. It maintained a card catalog of practically every buyer of oil in the country, showing where virtually every barrel shipped by independent dealers went — and where every grocer, from Maine to California, obtained his kerosene.
A central theme underlay Rockefeller’s management; he believed in oil, and his faith never wavered. Any drop in the price of crude was not a reason for anxiety, but an opportunity to buy.
It is not always the easiest of tasks to induce strong, forceful men to agree. The only way such a grouping could work was by consensus. Choices and decisions were debated and argued, but action was taken only when, as Rockefeller insisted, the problems had been turned around and around, the various contingencies anticipated, and, finally, agreement formed about the right direction. “It is always, I presume, a question in every business just how fast it is wise to go, and we went pretty rapidly on those days, building and expanding in all directions. We were being confronted with fresh emergencies constantly. How often we discussed those trying questions! Some of us wanted to jump at once into big expenditures, and others to keep to more moderate ones. It was usually a compromise but one at a time we took these matters up and settled them, never going as fast as the most progressive ones wished, nor quite so carefully as the conservatives desired.” He added that they always made the vote unanimous in the end.
The men around the lunch table at 26 Broadway were an unusually talented group. “These men are smarter than I am a great deal. They are very enterprising and smart men. I never came into contact with any class of men so smart and able as they are in their business.”
But the smartest was certainly John D. Rockefeller. At the time the trust was formed, he was in his early 40s, already one of the half-dozen richest men in America. He was the guiding force of the company, single-minded in his devotion to its growth and the cause of combination, scathing in his disdain for the “waste” of unbridled competition — and with no shortage of self-righteousness about his purpose. He was also strangely, and deliberatively, inaccessible.
He had resolved from the beginning of his business career to “expose as little surface as possible.” He was analytical and suspicious, and he kept his distance from people. His remoteness and icy, penetrating stare were unnerving.
But those years of consolidation and integration, of unexpected political and press attacks, were also years of great strain and tension. “All the fortune that I have made has not served to compensate me for the anxiety of that period,” Rockefeller once said. His wife, too, would remember that time as “days of worry,” and he himself would recall that he seldom got “an unbroken night’s sleep.”
Father was never willing to pay a bill which he did not know to be correct in all its items. Such care in small things might seem penurious to some people, yet to him it was the working out of a life principle.
Those who, on account of the dearness or inefficiency of whale oil, were accustomed to go to bed soon after the sunset and spend almost half their time in sleep, now occupy a portion of the night in reading and other amusements; and this is more particularly true of the winter seasons.
By the mid-1880s, its control of marketing must have been almost equivalent to its control of refining — in the 80% range. And its tactics in acquiring that huge market share were just as ruthless. Its salesmen would “make a fist” and seek to intimidate both rivals and errant retailers who dared to carry competing products. Standard pushed a series of innovations to make its marketing more efficient and lower costs. Much effort was made to do away with the bulky, leaky, awkward, and expensive barrel. One innovation was the railway tank car, which eliminated the need to pile barrels into boxcars. Standard also replaced barrels on the streets of America with horse-drawn tank cars, which could disburse to a retailer anything from a pint to 5 gallons of kerosene. Wooden barrels were eventually reserved only for the hinterlands, from which it was assumed they would not return.
But Standard had stayed out of one critical part of the business - the production of oil. It was too risky, too volatile, too speculative. Who knew when any particular well might go dry? Better to let the producers carry that risk and stick to what could be rationally organized and managed of refining, transportation, and marketing.
And to those throughout the oil industry who suffer from Rockefeller’s machinations — from the ceaseless commercial pressures and the “good sweatings,” from the duplicity and secret arrangements — he was a bloodless monster, who hypocritically invoked the Lord as he methodically set about destroying people’s livelihoods and even their lives in his pursuit of money and mastery.
Yet, whereas many of the other robber barons amassed their wealth by speculation, stock and financial manipulation, and outright fraud — cheating their stockholders — Rockefeller built his fortune by taking on a youthful, wild, unpredictable, and unreliable industry, and relentlessly transforming it according to his own logic into a highly organized, far-flung business that satisfied the basic hunger for light around the world.
Faced with the aggressive Nobel’s new sales campaign in Europe, and deeply alarmed by the growing production from Baku, Standard concluded that it would have to take actions beyond mere discussions. It dropped its prices in Europe — just as it would when attacking a competitor in the US. Its local agents started rumor campaigns in various countries about the quality and safety of Russian kerosenes. They also restored to sabotage and bribery. Despite the ferocity of the Standard assault, Nobel and the Rothschilds fought back fiercely and successfully, and Standard’s executives watched with dismay as the region of what they ominously labeled “Russian competition” broadened across the map.
The savings on space and weight, and the gain in volume, would greatly reduce shipping costs per gallon. Like Rockefeller with the railroads, Samuel understood the absolute need to master transportation costs. The type of tanker then in operation simply would not do.
He acquired an excellent site in HK, and he hurried to buy a site in Shanghai before the CNY since “it can be got cheaper because the Chinese have to pay all their debts contracted during the past year & they are requiring money.”
“Americans are always in a hurry and Dutchmen never.” Still, Royal Dutch did not feel secure. Its directors and management knew how Standard Oil had operated in America — buying up shares in offending competitors quietly, and then putting them out of action. To forestall such a stratagem, the directors of Royal Dutch created a special class of preference stock, the holders of which controlled the board. To make acquisition even more difficult, admission to this exclusive rank was by invitation only.
Baku was the territory of the “eternal pillars of fire” worshipped by the Zoroastrians.
Samuel needed a new, larger, technologically more advanced type of tanker, and he commissioned the design and construction of such ships.
For him, invention was not a hobby, it was a business. “We have got to keep working up things of commercial value — that is what this laboratory is for. We can’t be like the old German professor who as long as he can get his black bread and beer is content to spend his whole life studying the fuzz on a bee!” Edison immediately applied himself to the question of commercializing his invention, and in the process, created the electric generation industry.
Yet just as one market was about to slip away, another was opening — that of the “horseless carriage,” otherwise known as the automobile.
It was so slow and so boring that there was first heard the cry, “Get a horse!”
Heretofore, gasoline had been an insignificant part of the output of the refining process, with some small value for solvents and as a fuel for stoves, but with little other use. In 1892, an oil man had congratulated himself for managing to sell gasoline for as much as 2 cents a gallon.
For most of the next dozen years, California was to lead the nation in oil production. By 1910, its output would reach 73M barrels, more than that of any foreign nation, and 22% of total world production.
William knew he was caught up in a fever. “For a great many of the oil men, the oil business was more like an epic card game, in which the excitement was worth more than great stacks of chips. None of us was disposed to stop, take his money out of the wells, and go home. Each well, whether successful or unsuccessful, provided the stimulus to drill another.”