The prospectors who descended on Pennsylvania’s Western hills in the months following Drake’s 1859 discovery of “rock oil” had no idea of oil’s true potential. They didn’t know that oil would dictate the fortunes of millions of people for the next 150 years. They didn’t know that the pursuit of oil would push great nations into war and they didn’t know that their initial wildcatting would propel the United States to become the most important nation on earth. All that mattered at the time was that there was a fortune to be made. Kerosene lamps were already being celebrated as “the new light” in cities up the Eastern coast and Pennsylvania oil promised a new abundant source.
Thousands of people – many of them Civil War veterans - flocked to stake a claim in the new oil regions. In January 1861, barely a year after Drake’s initial discovery, the price of a barrel of oil hit $10 (Drake had collected the first oil in whiskey barrels and the 42 gallon measure has remained the industry standard ever since). By the end of the year, however, as more and more wells were stuck and prospectors frantically offloaded their oil, the new pioneers came to realize just how fickle their fortune could be. Prices dropped to 10 cents a barrel and the oil industry confronted what would be the first of many gluts in its history.
Yet out of the Oil Regions’ chaos came order and control in the figure of John D. Rockefeller, owner of a small refinery in Cleveland Ohio. Rockefeller observed how the hundreds of Pennsylvania drillers were bidding against each other and so were driving down the cost of oil. Rockefeller realized the essence of making money in this new volatile industry lay not in producing oil but in controlling the transport and sale of oil’s refined products.
Though only 26 years old, Rockefeller bought out his refinery partners and started building up a strong cash position. This liquidity gave him the leverage he needed to buyout competing refineries when the next production glut sent oil prices plummeting and cut revenues for both producers and refiners.
Rockefeller soon began undercutting his rivals by persuading the railroads that carried the oil out of the Oil Regions to give him secret rebates on his shipments based on the volume of his business. By 1870, Rockefeller was able to establish a joint-stock company named the Standard Oil Company. After just seven years in the business, this company controlled one tenth of the US oil industry.
Standard Oil’s business methods were ruthless. The company tried to squeeze many competitors out of business by deliberately cutting its prices in one market, knowing all the time that with its superior cash reserves it could hold out until competitors folded. When Rockefeller bought these companies, he would keep the transactions secret so that his other competitors would not know which companies were owned by Standard and working against them.
By 1883, Standard was laying the foundations for what we now know as the vertically integrated company and the modern multinational. He owned refineries and the new pipelines that were transforming the transportation of oil. He had bought up oil fields. And he was opening up new markets for his products on the East Coast and Europe.
In 1906, following years of investigations and a series of damning newspaper and magazine articles on Standard’s predatory practices, the US government brought a massive lawsuit against the company under the statute of the 1890 Sherman anti-trust act. By now, Standard had recorded over a billion dollars profit since its inception 25 years before. The case dragged on for five years and Standard argued it all the way up the Supreme Court. But in May 1911, Chief Justice Edward White declared Standard Oil a monopoly and ordered that it must divest itself of all its subsidiaries.
By the end of the year, Standard had been split into 34 companies. The break-up destroyed Standard’s singular stranglehold on the oil industry but it didn’t destroy the strength of the Standard brand. On the contrary, Standard’s model was so strong and the US oil industry so vibrant that a number of the new mini-me Standard clones soon emulated Standard’s success. Three in particular, Standard Oil of New Jersey (later to be known as Exxon), Standard Oil of New York (Socony and later Mobil) and Standard Oil of California (Socal, later Chevron) quickly became global powers in their own right.