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04/14/2006

Monopoly, Part I

The Atlantic Monthly magazine is celebrating its 150th
anniversary this year and in doing so running excerpts from some
of its more historical articles.

One of these was by muckraker Henry Demarest Lloyd, a March
1881 piece titled “Story of a Great Monopoly” and in looking up
the full piece you have the tale of John D. Rockefeller, his
Standard Oil Company, and the monopoly of the rail lines in
terms of shipping petroleum and products such as kerosene.

But first, by the mid-1850s Americans were increasing their
evening activities thanks to better and more extensive
illumination. Gaslight was available in the cities since the 1820s,
but it wasn’t in the countryside where most Americans still lived.
In urban areas coal gas was piped to customers, though because
of the infrastructure cost, only in densely populated areas was it
feasible.

Of course you also had whale oil, a product of the blubber that
was fuel for lamps. Market historian John Steele Gordon writes
in his book “An Empire of Wealth” that whereas in the early
days, like starting in 1645, New England whalers didn’t stray too
far from shore and focused on right whales because they were so
abundant, in 1712 “an offshore whaler was blown out to sea in a
storm, and the crew managed to catch a sperm whale and bring it
safely home.”

It turns out the oil from a sperm whale was superior to that of
other whales and they became highly profitable. Gordon writes:

“By 1765 New England whalers were calling at the Azores and
were operating off the coast of Brazil soon afterward. By the
1770s New England was exporting three to four hundred
thousand pounds of spermaceti candles a year.”

And by the 1840s there were over 700 American whaling ships
with each one unloading as many as 2,000 barrels of oil at the
end of their voyages. Unfortunately, the business was too
successful and they were catching sperm whales faster than the
goliaths could reproduce. As John Steele Gordon writes, “the
voyages became longer and longer (it was an American whaler
who discovered the ‘Bounty’ mutineers on Pitcairn Island in
1808) (and) the price of whale oil rose steadily as demand
continued to increase faster than supply.”

In fact by the 1850s a gallon of whale oil cost $2.50 when $5 a
week was a good wage for skilled labor. But as with other
commodities in the history of the world, such a price led to a
search for alternatives and one such substitute was coal gas,
made by heating the rock. Another was kerosene, extracted from
coal tar (what’s left after the gas), which was first distilled in the
1850s.

[Gordon notes that coal tar also became a source for a whole new
industry – chemicals – including for insecticides, plastics, paints
and medicines.]

But the ultimate solution for illumination came from rock oil.
John Steele Gordon:

“In 1853 a Dartmouth graduate named George Bissell happened
to be visiting his old school when he saw in a professor’s office a
bottle of rock oil that had come from western Pennsylvania. He
knew that the stuff was flammable and suddenly conceived of the
idea that it could be turned into an illuminant.”

Professor Benjamin Silliman, Jr. of Yale concluded “rock oil
could easily be fractionated into various substances, including
kerosene, by heating it. ‘Gentlemen,’ Silliman reported, ‘it
appears to me that there is much ground for encouragement in
the belief that your Company have in their possession a raw
material from which by simple and not expensive processes, they
may manufacture very valuable products.’”

Of course they all looked around and said, “Good but where do
we get all the rock oil?” The only oil anyone had seen was in
northwestern Pennsylvania where it could be skimmed off the
waters of a creek that flowed into the Allegheny River.

But it was on a hot summer’s day in 1856, with George Bissell
sitting under a druggist’s awning in New York City, that he had
another revelation.

John Steele Gordon:

“(Bissell) noted an advertisement for a patent medicine made
from rock oil that showed several derricks of the sort that were
used to bore for salt. The rock oil used in the medicine, it
happened, came from the oil obtained as a by-product of drilling
for salt. Bissell wondered if it might be possible to use the
technology of drilling to find oil.”

Bissell hired a fellow by the name of Edwin Drake and after
much difficulty, on August 27, 1859, Drake and his team of salt
drillers struck oil outside Titusville, Pennsylvania. Basically,
Drake had stumbled on a gusher, and a year later, as word spread
and thousands poured into the region, Pennsylvania had
produced 450,000 barrels of oil.

This oil, as it turned out, could easily be refined into good
kerosene that wasn’t just the perfect illuminant, it could also be
used for heating and cooking. At first, though, the price of oil
was $10 a barrel (around $150 in today’s money), though as
supply outstripped demand the price plummeted. By the end of
1861, a barrel of oil could be had for 10 cents; or less than the
cost of the barrel itself.

But due to shortages created by the Civil War, oil rebounded
back to $7.25 by September 1863 and by the end of the war had
reached $13.75, thus fueling another round of speculation and a
rush of prospectors.

And here’s a classic tale, courtesy of Mr. Gordon and a separate
piece he did for the November / December 2005 issue of
American Heritage:

“In the tiny (northwestern Pennsylvania) town of Pithole the first
oil well was drilled in January 1865. More and more wells came
in, and by September the town was pumping 6,000 barrels a day,
two-thirds of the total Pennsylvania production. A Pithole farm,
considered virtually worthless for agriculture, sold for two
million dollars in that month. Then, a couple of months later, the
wells suddenly gave out. By early 1866 Pithole was a ghost
town.”

Suddenly, all were fearful. Was this the future of the entire oil
industry? After all, the only crude that was known to exist in the
entire world back then was in Pennsylvania and a sliver of
upstate New York. Little was known of the science of geology
and finding reserves. And with the wild price fluctuations, the
refinery business was a mess and those who were brave enough
to invest often employed tremendous amounts of leverage to
finance their projects.

The early refineries were located in just two places, Pittsburgh
and Cleveland, with Cleveland having a transportation edge.
One man made the most of this .John D. Rockefeller.

Now I’m not even going to attempt to do Rockefeller’s story
justice, but for the purposes of this piece, a little background is in
order.

Rockefeller was born in Richford, New York in 1839, the son of
William Avery Rockefeller, a commodities dealer, and his wife
Eliza (Davison) Rockefeller. The family moved to a farm near
Cleveland, Ohio, in 1853.

From “The Oxford Companion to United States History,” edited
by Paul S. Boyer:

“Combining his mother’s pious humility and his father’s brash
ambition, Rockefeller early sought ‘something big.’ Becoming a
partner in a produce business in 1859, Rockefeller began his
business career in Cleveland as a bookkeeper. Viewing a
contract as a covenant and trust as the basis of all business
relationships, he won the respect of Cleveland’s business
community for his piety, seriousness, and perseverance. Coming
of age at the dawn of the petroleum boom, Rockefeller, in
partnership with his brother William, Henry M. Flagler, and
others, established The Standard Oil Company of Ohio,” which
was incorporated in 1867 and “soon dominated the industry and
commanded markets worldwide. His innovative vertical
integration, from oil wells and pipelines to retail-distribution
outlets, secured his company a competitive edge in a cut-throat
business. His ruthless horizontal integration, involving merger
with or eliminating competitors, won for Standard Oil a near
monopoly.”

For another take, here’s a bit from George Brown Tindall and
David E. Shi’s “America: A Narrative History”:

“While other young men were going off to war, Rockefeller
moved into the oil business. In 1860, sent out by business
friends to look over the Pennsylvania fields, he advised against
the risks of sinking wells, but saw that refining promised great
profits at little risk. In 1862 he backed a refinery started by his
friend Samuel Andrews. He then formed a partnership with
Andrews, and in 1867 added H.M. Flagler to create the firm of
Rockefeller, Flagler, and Andrews.”

Standard Oil Company of Ohio was then formed with a
capitalization of $1 million and Rockefeller was already the
largest refiner.

But as he put it, “the butcher, the baker, and the candlestick
maker began to refine oil.” As a result, “the price went down
and down until the trade was ruined.”

Tindall and Shi:

“Rockefeller resolved to bring order out of chaos, which is to say
he decided to weed out the competition, and he soon fastened
upon an ingenious plan. In 1872 Rockefeller created the South
Improvement Company, which he made the marketing agent for
a large percentage of his oil shipments. By controlling this
traffic, he gained clout with the railroads, which gave him large
rebates (secret discounts) on the standard freight rates in order to
keep his business. In some cases he forced the railroads to
provide information on competitors’ shipments. Rockefeller
then approached his Cleveland competitors and offered to buy
them out at his own price. Most of them saw the wisdom of this
course. As Rockefeller put it, ‘the conditions were so chaotic
[that is, competitive] that most of the refiners were very desirous
to get out of the business.’ By 1879 Standard Oil controlled 90-
95 percent of the oil refining in the country.”

Well, you know what happens next. 90-95 percent of anything is
a monopoly, and Standard Oil became the target of antitrust
legislation and exposes by a new breed of muckraking journalists
such as Henry Demarest Lloyd.

And so we’ll pick up our story next week with the above
mentioned Lloyd piece from The Atlantic Monthly, 1881.

Brian Trumbore



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-04/14/2006-      
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Wall Street History

04/14/2006

Monopoly, Part I

The Atlantic Monthly magazine is celebrating its 150th
anniversary this year and in doing so running excerpts from some
of its more historical articles.

One of these was by muckraker Henry Demarest Lloyd, a March
1881 piece titled “Story of a Great Monopoly” and in looking up
the full piece you have the tale of John D. Rockefeller, his
Standard Oil Company, and the monopoly of the rail lines in
terms of shipping petroleum and products such as kerosene.

But first, by the mid-1850s Americans were increasing their
evening activities thanks to better and more extensive
illumination. Gaslight was available in the cities since the 1820s,
but it wasn’t in the countryside where most Americans still lived.
In urban areas coal gas was piped to customers, though because
of the infrastructure cost, only in densely populated areas was it
feasible.

Of course you also had whale oil, a product of the blubber that
was fuel for lamps. Market historian John Steele Gordon writes
in his book “An Empire of Wealth” that whereas in the early
days, like starting in 1645, New England whalers didn’t stray too
far from shore and focused on right whales because they were so
abundant, in 1712 “an offshore whaler was blown out to sea in a
storm, and the crew managed to catch a sperm whale and bring it
safely home.”

It turns out the oil from a sperm whale was superior to that of
other whales and they became highly profitable. Gordon writes:

“By 1765 New England whalers were calling at the Azores and
were operating off the coast of Brazil soon afterward. By the
1770s New England was exporting three to four hundred
thousand pounds of spermaceti candles a year.”

And by the 1840s there were over 700 American whaling ships
with each one unloading as many as 2,000 barrels of oil at the
end of their voyages. Unfortunately, the business was too
successful and they were catching sperm whales faster than the
goliaths could reproduce. As John Steele Gordon writes, “the
voyages became longer and longer (it was an American whaler
who discovered the ‘Bounty’ mutineers on Pitcairn Island in
1808) (and) the price of whale oil rose steadily as demand
continued to increase faster than supply.”

In fact by the 1850s a gallon of whale oil cost $2.50 when $5 a
week was a good wage for skilled labor. But as with other
commodities in the history of the world, such a price led to a
search for alternatives and one such substitute was coal gas,
made by heating the rock. Another was kerosene, extracted from
coal tar (what’s left after the gas), which was first distilled in the
1850s.

[Gordon notes that coal tar also became a source for a whole new
industry – chemicals – including for insecticides, plastics, paints
and medicines.]

But the ultimate solution for illumination came from rock oil.
John Steele Gordon:

“In 1853 a Dartmouth graduate named George Bissell happened
to be visiting his old school when he saw in a professor’s office a
bottle of rock oil that had come from western Pennsylvania. He
knew that the stuff was flammable and suddenly conceived of the
idea that it could be turned into an illuminant.”

Professor Benjamin Silliman, Jr. of Yale concluded “rock oil
could easily be fractionated into various substances, including
kerosene, by heating it. ‘Gentlemen,’ Silliman reported, ‘it
appears to me that there is much ground for encouragement in
the belief that your Company have in their possession a raw
material from which by simple and not expensive processes, they
may manufacture very valuable products.’”

Of course they all looked around and said, “Good but where do
we get all the rock oil?” The only oil anyone had seen was in
northwestern Pennsylvania where it could be skimmed off the
waters of a creek that flowed into the Allegheny River.

But it was on a hot summer’s day in 1856, with George Bissell
sitting under a druggist’s awning in New York City, that he had
another revelation.

John Steele Gordon:

“(Bissell) noted an advertisement for a patent medicine made
from rock oil that showed several derricks of the sort that were
used to bore for salt. The rock oil used in the medicine, it
happened, came from the oil obtained as a by-product of drilling
for salt. Bissell wondered if it might be possible to use the
technology of drilling to find oil.”

Bissell hired a fellow by the name of Edwin Drake and after
much difficulty, on August 27, 1859, Drake and his team of salt
drillers struck oil outside Titusville, Pennsylvania. Basically,
Drake had stumbled on a gusher, and a year later, as word spread
and thousands poured into the region, Pennsylvania had
produced 450,000 barrels of oil.

This oil, as it turned out, could easily be refined into good
kerosene that wasn’t just the perfect illuminant, it could also be
used for heating and cooking. At first, though, the price of oil
was $10 a barrel (around $150 in today’s money), though as
supply outstripped demand the price plummeted. By the end of
1861, a barrel of oil could be had for 10 cents; or less than the
cost of the barrel itself.

But due to shortages created by the Civil War, oil rebounded
back to $7.25 by September 1863 and by the end of the war had
reached $13.75, thus fueling another round of speculation and a
rush of prospectors.

And here’s a classic tale, courtesy of Mr. Gordon and a separate
piece he did for the November / December 2005 issue of
American Heritage:

“In the tiny (northwestern Pennsylvania) town of Pithole the first
oil well was drilled in January 1865. More and more wells came
in, and by September the town was pumping 6,000 barrels a day,
two-thirds of the total Pennsylvania production. A Pithole farm,
considered virtually worthless for agriculture, sold for two
million dollars in that month. Then, a couple of months later, the
wells suddenly gave out. By early 1866 Pithole was a ghost
town.”

Suddenly, all were fearful. Was this the future of the entire oil
industry? After all, the only crude that was known to exist in the
entire world back then was in Pennsylvania and a sliver of
upstate New York. Little was known of the science of geology
and finding reserves. And with the wild price fluctuations, the
refinery business was a mess and those who were brave enough
to invest often employed tremendous amounts of leverage to
finance their projects.

The early refineries were located in just two places, Pittsburgh
and Cleveland, with Cleveland having a transportation edge.
One man made the most of this .John D. Rockefeller.

Now I’m not even going to attempt to do Rockefeller’s story
justice, but for the purposes of this piece, a little background is in
order.

Rockefeller was born in Richford, New York in 1839, the son of
William Avery Rockefeller, a commodities dealer, and his wife
Eliza (Davison) Rockefeller. The family moved to a farm near
Cleveland, Ohio, in 1853.

From “The Oxford Companion to United States History,” edited
by Paul S. Boyer:

“Combining his mother’s pious humility and his father’s brash
ambition, Rockefeller early sought ‘something big.’ Becoming a
partner in a produce business in 1859, Rockefeller began his
business career in Cleveland as a bookkeeper. Viewing a
contract as a covenant and trust as the basis of all business
relationships, he won the respect of Cleveland’s business
community for his piety, seriousness, and perseverance. Coming
of age at the dawn of the petroleum boom, Rockefeller, in
partnership with his brother William, Henry M. Flagler, and
others, established The Standard Oil Company of Ohio,” which
was incorporated in 1867 and “soon dominated the industry and
commanded markets worldwide. His innovative vertical
integration, from oil wells and pipelines to retail-distribution
outlets, secured his company a competitive edge in a cut-throat
business. His ruthless horizontal integration, involving merger
with or eliminating competitors, won for Standard Oil a near
monopoly.”

For another take, here’s a bit from George Brown Tindall and
David E. Shi’s “America: A Narrative History”:

“While other young men were going off to war, Rockefeller
moved into the oil business. In 1860, sent out by business
friends to look over the Pennsylvania fields, he advised against
the risks of sinking wells, but saw that refining promised great
profits at little risk. In 1862 he backed a refinery started by his
friend Samuel Andrews. He then formed a partnership with
Andrews, and in 1867 added H.M. Flagler to create the firm of
Rockefeller, Flagler, and Andrews.”

Standard Oil Company of Ohio was then formed with a
capitalization of $1 million and Rockefeller was already the
largest refiner.

But as he put it, “the butcher, the baker, and the candlestick
maker began to refine oil.” As a result, “the price went down
and down until the trade was ruined.”

Tindall and Shi:

“Rockefeller resolved to bring order out of chaos, which is to say
he decided to weed out the competition, and he soon fastened
upon an ingenious plan. In 1872 Rockefeller created the South
Improvement Company, which he made the marketing agent for
a large percentage of his oil shipments. By controlling this
traffic, he gained clout with the railroads, which gave him large
rebates (secret discounts) on the standard freight rates in order to
keep his business. In some cases he forced the railroads to
provide information on competitors’ shipments. Rockefeller
then approached his Cleveland competitors and offered to buy
them out at his own price. Most of them saw the wisdom of this
course. As Rockefeller put it, ‘the conditions were so chaotic
[that is, competitive] that most of the refiners were very desirous
to get out of the business.’ By 1879 Standard Oil controlled 90-
95 percent of the oil refining in the country.”

Well, you know what happens next. 90-95 percent of anything is
a monopoly, and Standard Oil became the target of antitrust
legislation and exposes by a new breed of muckraking journalists
such as Henry Demarest Lloyd.

And so we’ll pick up our story next week with the above
mentioned Lloyd piece from The Atlantic Monthly, 1881.

Brian Trumbore