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In 1855, Benjamin Silliman, Jr., a professor of chemistry, fumed when he did not receive payment for the report on ‘rock oil’ he had prepared for a group of investors led by George Bissel. The test ran by the chemist proved that they could distill a superior, economical fuel for lamps, while a different process could make it useful for lubricating machinery. They formed a company for exploration. In England, entrepreneurs looked to exploit asphalt and its derivative, kerosene.
By the mid-19th century, with the idea of drilling for salt form the Chinese. Around 1830 Edwin “Colonel” Drake had began to apply their methods in Titusville, PA. Colonel was a determined individual who refused to give up. After getting oil right before being ordered to shut down his operations. Soon there were 75 producing wells in Titusville, and Bissell grew wealthy. Near the ‘Oil Regions,’ refineries sprung up to process crude oil into kerosene. Soon production outpaced consumption during the Civil War, prices fell, and many newly rich producers were ruined. After the war, however, veterans returned in search of opportunities, and new companies mushroomed. Greedy entrepreneurs knew little about geology, and, following English common law’s ‘rule of capture,’ over harvested and depleted oil reserves too quickly. Muddy, oil slick communities vanished into ghost towns. Transporting barrels from the Oil Region created a physical bottleneck, placing the oil companies at the mercy of teamsters. They settled on pipelines as an alternative method of delivery. Informal oil exchanges developed to coordinate buying and selling between producers and refiners. They provided for regular sales, spot sales, and futures. By 1871, petroleum was well on its way to becoming the biggest and immensely profitable business.
In 1865 Maurice Clack owner of a Cleveland refinery sold out to his partner John Rockefeller for $72,000. After hearing about the breakthrough of Colonel. The partner began to focus more on their oil refinery. Rockefeller worked to improve the quality of his products and began taking the steps towards integrating supply and distribution, to insulate his business from market volatility and to improve its competitive position. Rockefeller focus on understanding every part of the new industry. In 1867, Henry Flagler joined Rockefeller, together the worked on creating a cooperation. Among producer, Flagler believed that cooperation was the way to fewer risk. In 1870, the Standard Oil Company was the product of Flagler and Rockefeller joining up together. Flagler formed an argument with railroads to get discount on freight rates, in order to get a pricing advantage and raise profits. Rebates evolved into ‘drawbacks,’ an arrangement whereby railroads paid Standard a percentage of the non-discounted price that rival companies paid. They cloaked these arrangements through a mysterious corporation, causing enraged competitors to boycott the refinery/railroad cartel. Thus began the first ‘Oil War.’ Rockefeller was not swayed by press hostility, however, and as cutthroat production could not be controlled, concentrated on making refining safe and profitable. Whenever friendly acquisitions failed, Standard gave targets ‘a good sweating’ by cutting prices to the point they could not survive. Takeovers were cloaked through ostensibly independent companies within the Standard Group. By 1879, Standard controlled 90% of U.S. refining capacity, as well as the pipelines, gathering systems, and transportation.
In 1879, Oil Region producers used deception and speed to construct the 110-mile Tidewater Pipeline to a railway connection, and Standard responded by building pipelines to Cleveland, New York, Philadelphia, and Buffalo, and by buying up sufficient Tidewater stock to arrange a pooling of shipments. The independents turned to the political and legal systems, filing suits in Pennsylvania against discriminatory rates.
Needing a shield of legality without sacrificing administrative flexibility, Standard initiated a trust agreement in 1882 that created for a board of trustees who would control 700,000 shares and supervised 14 wholly- and partly-owned companies. Standard organizations were incorporated in the various states in which they operated. A central office coordinated and rationalized their activities. Eight specialized committees were established to manage various products. An executive committee set policy. Achieving the goal of being the low-cost oil producer required efficiency of operations, mastery of costs, massive scale and volume, technological initiative, and ceaseless striving for ever-larger markets. Arbitrage, corporate intelligence, and espionage proved effective tools. Rockefeller, his brother William, Flagler, and two other associates controlled 57% of the stock. Another dozen intelligent, enterprising, willful, and assertive individuals – most bought-out competitors – rounded out senior management. Unanimous consensus ruled, following extensive formal debate and luncheons in the private dining room of the headquarters at 26 Broadway in Lower Manhattan.
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