Oil Monopolies in the Late 1800s

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After the Civil War, kerosene was becoming widely used in ovens and lamps. By the latter part of the 1800s, refining crude oil into kerosene was becoming a lucrative industry. During this period, one U.S. company grew to become so large that it held a monopoly on the entire industry: John D. Rockefeller's Standard Oil.

Standard Oil

  • In 1863, Rockefeller and his business partner invested in a company that refined crude oil into kerosene. By 1870, the company had two oil refineries in Cleveland, and was incorporated as the Standard Oil Company. One of the key costs associated with the oil industry was transportation. Rockefeller made covert deals with the railroads to receive a discounted rate based on the volume of business he could promise. Oil prices at the time fluctuated wildly, and Rockefeller sought to control oil prices. To achieve this, he formed a secret alliance of railroads and oil refiners who colluded to set rates for freight costs and oil prices. Although the deal soured when the railroads backed out, Rockefeller used it to his advantage by intimidating his competitors, causing 20 Cleveland-area refiners to sell their companies to him at rock-bottom prices. When the so-called "Cleveland Massacre" was complete in 1872, Standard Oil controlled one-quarter of the American oil industry.

Business Practices

  • During the next few years, Rockefeller continued to buy out as many oil refiners as he could. In 1874, Rockefeller also began acquiring pipeline networks, which allowed him to cut off the supply of crude oil to refineries he wanted to buy. With no oil to refine, these companies stopped generating revenue, allowing Rockefeller to buy these now-desperate companies for a fraction of their worth. When a rival company attempted to build its own pipeline, Rockefeller bought up land in the pipeline's planned path to block it. Rockefeller ultimately made a deal with this company that resulted in Standard Oil controlling ownership of nearly all the nation's pipelines.

Standard Oil Trust

  • In 1882, Rockefeller formed the Standard Oil Trust, which included Standard Oil and 40 other companies it owned either wholly or partly. Standard Oil divided its operations into 11 districts throughout the U.S., creating various shell companies that appeared to compete with Standard Oil, but whose real purpose was to crush the company's competition. To stimulate demand for its kerosene, the company sold inexpensive lamps and stoves, sometimes even giving them away for free. One of Standard Oil's primary strategies was to cut its own prices so low that its competitors were forced to do the same, which ultimately caused them to lose money until they were forced to go out of business. Standard would then purchase the company, and raise oil prices to recoup the losses incurred.

Sherman Anti-Trust Act

  • By 1890, Standard Oil controlled 90 per cent of America's oil industry, with little competition remaining. Standard Oil could set prices arbitrarily, with consumers having no choice but to pay the prices it set. That same year, the U.S. Department of Justice sued Standard Oil, enacting the Sherman Anti-Trust Act, which sought to limit monopolies and cartels. The legal battle continued for the next decade, until Standard was forced to break up into 34 independent companies, each with its own separate board of directors. The stock of these new companies soared. Rockefeller, who owned stock in all of them, emerged from this action as the world's richest individual.

References

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