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A Brief History of Oil Pt 3: 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.
Good
Investing!
Gaham
Summers
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Actually it wasnt always so benign. Evidence from the civil trials suggests he would price below his cost of production temporarily in order to bankrupt the local competition. An intentionally undervalued yuan works the same way. Once china has everything they will raise the yuan peg and charge higher prices. When there is no competition left china knows what to do. They follow rockefellers playbook!
It cannot be assumed that SO took an intentional loss, given JDR's incredibly frugal cost-cutting measures. He went so far as to reduce the number of nails used to build a barrel, and count each one. If his books were off by a PENNY, he insisted they balance.
No, I do not believe he abused his power. He let The Market work for him, and expose the poor management of other companies. It should also be known that SO Stock was offered as the currency for takeovers, those that accepted became wildly rich with him.
Your point on China is spot on however.
This whole article is pointless other than a brief history lesson, can I have my 5 minutes back please?
This has already played out in the rare earth mineral space.
It is similar to the demands issued by people on this site concerning the US military network and how the other countries should foot the bill.
Same way of thinking.
Rockfeller was a true American.
Rockefeller was paid rebates on ALL oil that was shipped, not just his own.
It's not just who you know, it's what you know....
http://coat.ncf.ca/our_magazine/links/53/rockefeller.html
[snip]:
"John Davison Rockefeller (1839-1937), the world’s first billionaire, was America’s most generous philanthropist, fascist financier and Nazi collaborator.
His incredible rags-to-riches success story owes much to what he learned from his father’s attitudes towards business and respect for the public good.
Descended from hardworking German immigrants, his father William Avery Rockefeller was a travelling, snake oil salesman. “Big Bill” excelled as a quack doctor, or pitch man, conning the sick and desperate into buying expensive remedies that were either useless or downright dangerous. “He would be gone for months and come back with a great roll of money…. He would go to small towns and put up handbills advertising himself as ‘The Celebrated Dr. Levingston.’ He advertised to cure anything, but made a specialty of cancer and kidney troubles” (MacDonald, “Double Life,” New York World, February 2, 1908).
But these were not “Doc’s” only crimes. He was indicted for rape, but was not arrested or tried. He fled the area with family and escaped neighbours who accused him of horse thieving, burglary, arson and counterfeiting. He had two wives, simultaneously, and was a bigamist for 34 years. He met his second wife in Norwich, Ontario, where he sold lumber in 1853, calling himself William Levingston."
The stuff the US dream is made of.
Gosh why do we always go back to history without including the "now" information and analysing same together. Humanity is just pathetic. All this talk over what....a stock market. And what is that? A game.
I suppose he never woke up in the middle of the night and think what the fuck am I doing this for, I could have been a banker.
While not equipped with the background knowledge to speculate what could have been the future of the American oil industry, I wonder how things would have turned out, economically, if Standard Oil would not have been broken up? At the age of 57, I still long for the days of dependable, long-lasting, phones that could take a good beating and still function, a reliable local power source, owned by Commonwealth Edison, gas by North Shore Gas. These companies provided good entry level training to supply themselves with the work force that they needed to serve the consuming public with good reliable utility service. Their rates were fairly consistent and affordable. Since they were regulated monopolies, the overall company pay structure remained within the historical norms, I believe. With the breakup of AT&T, what did we get? First, facsimile machines that were issued existing local area codes, then pagers, then car phones, then mobile phones, until they ran out of numbers. That is when the local phone rates changed. I saw a chart on a zerohedge article a couple of weeks ago that showed corporate executive compensation from the 50's on. The line stayed on an even keel until about 1983 and from then until now, it rose almost vertically on the chart. My formal education ended after high school, but I am an avid reader, especially this site, and I appreciate the intelligent, eloquent, commentary and links provided by the more serious and thoughtful members of this forum. I have a special place in my heart for the second amendment supporters, as well. D ranked USPSA member. I may be slow, but I am accurate.
Consider that those 'fairly consistent and affordable' rates were generally subsidized on the backs of others (much like the 'drawbacks' from shippers in the article).
Old folks believe that Medicare is 'affordable', but its generally because some younger patient down the hall is getting the majority of the senior's bill tacked onto the end of his.
dude FUCK YOUR FORMAL EDUMACATION. you got more smarts in your left pinky than the entire the us gubermint. and i know you wokr w your hands right? invaluable! that i thought was an excellent breakdown of the cell market overthe past 20 years at least. thing is turn it on them I do. it's ezier for me cause ,.... it's ezierbut what i do is war very fucking day 24/7 what do i mean?
i burn a prepaid cellie every month or so, makes the peoole who know me pissed atfirst but noew they laff, but it costthe coporates every time, I USE THEM not the other way around. thats the key use them notthem you. sometimes difficult, but always possible. this is what has to happen if we dont want the sthtf. ok man, stay up !