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Definition: Standard Oil from The Hutchinson Unabridged Encyclopedia with Atlas and Weather Guide

US company founded in 1870 by John D Rockefeller; it was divided in 1911 under anti-monopoly laws into 34 independent companies. The successor companies developed to form the core of the modern US oil industry, including Exxon and Mobil (which merged in 1999), Chevron, Marathon, and Conoco.


Summary Article: Standard Oil Company
from Business Scandals, Corruption, and Reform: An Encyclopedia

Standard Oil Company (SO) was the integrated oil giant controlling up to 90 percent of American oil (this was achieved about 1880) until its antitrust breakup in 1911. John D. Rockefeller was founder, chairman, and major stockholder when it was founded in 1870 as an Ohio company. The 1911 breakup created many of the largest oil companies that exist today, including ExxonMobil and Chevron.

The Civil War was a boom period for the oil industry, but after the war too many oil wells and refineries existed. Rockefeller, a major owner of refineries, believed that only cooperation across firms (called “conspiracy in restraint of trade” by critics) or consolidation could solve the problem of “ruinous competition.” He dissolved his partnership in 1870 and created SO in Ohio. SO bought out many competing refiners, primarily in Cleveland, beginning in 1872. Once SO bought out major rival Clark, Payne and Company, SO became the largest refiner in the world.

SO formed a cartel with the Pennsylvania Railroad in 1871, creating a shell company called South Improvement Company (SIC), believing this a partial solution to too much competition for both refiners and railroads. The Erie and New York Central Railroads joined this conspiracy, along with many refiners. The railroads increased freight rates, but gave secret rebates to the SIC refiners. Each railroad got a specific percentage of traffic from the conspiring refineries. After the existence of SIC was discovered, the Pennsylvania legislature canceled the agreement and forced SIC to shut down. After that, political bribery became a necessary step to solve legal and political problems. “A tremendous amount of money changed hands as businessmen and legislators trafficked in mutual manipulation” (Chernow 1998, 209).

This political cartoon, which appeared in Puck magazine in September 1904, depicts the Standard Oil monopoly as an octopus with many tentacles wrapped around the steel, copper, and shipping industries, as well as a state house, and the U.S. Capitol, and one tentacle reaching for the White House. (Library of Congress)

The oil industry was hit hard by the Panic of 1873, but SO was well positioned because of economies of scale, lower production costs, and plenty of cash. Many refiners sold out to SO, largely out of desperation. Most holdouts were driven out of business by SO. As a result, SO controlled all major refining centers by 1877. Lawsuits against SO and Rockefeller became commonplace. Clarion County, Pennsylvania, indicted Rockefeller and other SO executives in 1879 on conspiracy to monopolize and manipulate prices. SO executives in Pennsylvania were arrested and had to post bond. SO settled many disputes with drillers and refiners over buyouts and rebates out of court.

SO accumulated subsidiaries across the country. Because of limiting state laws, running this empire proved difficult. Regulatory investigations and other legal problems further hindered operations. SO was the parent company, but outlawed from owning corporations of other states; SO did have many out-of-state companies, but kept the information hidden. Legal solutions emerged, beginning with the trust, created by SO lawyer Samuel Dodd. The Standard trust agreement, signed at the start of 1882, created a board of trustees of nine members for the parent. The board received the stock of the 14 wholly-owned subsidiaries and shares in partially owned companies. The stockholders (not the corporations) received trust certificates in lieu of shares of the subsidiaries. Each subsidiary operated as a semi-independent corporation with a separate board of directors.

The trust worked because the subsidiaries followed orders. The board of trustees ran a complex system of committees specializing in the various aspects of manufacturing, transportation, and marketing. This use of a top-down structure under professional managers became the basic model for most big businesses during much of the twentieth century.

SO sought efficient operations. Smaller, inefficient plants were closed and refining centered on huge, modern plants in Cleveland, Philadelphia, and Bayonne, New Jersey. Cost accounting measures of performance from individual plants encouraged competition. Tracking unit costs by plant would determine relative efficiency. Oil moved increasingly by cheaper pipelines rather than by railroad. A vertical structure included a well-developed marketing plan. Middlemen were eliminated to increase revenue, product quality, and service. Cheap kerosene lamps and other products were produced to increase demand. As production and transportation costs declined, Rockefeller lowered retail prices. After he retired from active management in the mid-1890s, his successors were less willing to pass on cost savings.

SO and the railroads came under investigation by several states, providing public information on oil practices available to crusading journalists, regulators, and attorneys eager to sue. David Watson, attorney general of Ohio, discovered the illegality of SO's trust and he filed a petition against SO with the state supreme court in 1890 seeking to dissolve the giant. The state supreme court renounced the trust agreement in 1892. With New York's attorney general ready to follow suit, SO dissolved the trust.

In place of the trust, SO took advantage of New Jersey's new incorporation laws allowing holding shares in out-of-state companies. The reconstituted Standard Oil of New Jersey became the new parent, acquiring all the shares of the affiliates. The old executive committee dissolved and “elected” directors of Standard Oil of New Jersey. When New Jersey amended the incorporation laws, SO became a holding company with Standard Oil of New Jersey controlling all the affiliates in 1899.

Regulators continued to issue lawsuits. Rockefeller considered these lawsuits invalid and “fell back on his all-purpose explanation that the suits filed against him were just extortion rackets posing as public service” (Chernow, 1998, 426). SO spent large sums on political payoffs, to stop further regulations and lawsuits. Ohio Republican senator Mark (“Dollar Mark”) Hanna, a Rockefeller friend and a onetime oil refiner, unsuccessfully lobbied Attorney General Watson to drop the 1890 suit against SO. Politicians on the SO payroll included Ohio senator Joseph Foraker, Senator Matthew Quay, and Representative Joseph Sibley, both from Pennsylvania.

After Rockefeller retired from full-time management in the mid-1890s, retaining the title of president, SO vice president John Archbold became the real chief executive officer. Archbold proved to be more ruthless than Rockefeller in terms of both pricing products and illegal acts such as railroad rebates (specifically outlawed by the Elkins Act of 1903 and the Hepburn Act of 1906). Archbold paid “fees” to various politicians to limit political damage, and William Randolph Hearst broke the story of Archbold's bribery in the New York American. Muckraking journalists Henry Demarest Lloyd and Ida Tarbell wrote popular books about Rockefeller and SO. Lloyd's was an antibusiness populist rant, while Tarbell proved more balanced and better researched; she considered Rockefeller and SO executives competent, but corrupt. Less balanced were the rants she described from all those hating Rockefeller, usually from early events around eliminating competitors and railroad rebates.

The Justice Department sued SO in 1906 under the Sherman Act, charging the company with conspiracy in restraint of trade and monopolizing the oil industry. Evidence included railroad rebates, predatory pricing, buying out or ruining competitors, and secret ownership of companies assumed to be independent. Several state suits followed the federal lead. The federal circuit court ruled against SO in 1909. The Supreme Court in 1911 upheld the circuit court's ruling—SO would be broken up, creating 33 independent SO subsidiaries.

Rockefeller was on the golf course when he heard the news of the Supreme Court decision. Turning to his playing partner, he said, “Buy Standard Oil.” The SO shares were replaced by an equivalent amount in each of the new independent corporations. Most of the new companies traded on the New York Stock Exchange. Since they usually issued annual reports (unlike the original SO), investors saw the actual holdings. High dividends were paid, and within a year, the stock prices of most of the new oil companies double and continued up.

Standard Oil of New Jersey (later Exxon) remained the world's biggest oil company. The new Standard Oil of New York (later Mobil) continued to share offices with Standard Oil of New Jersey at 26 Broad. At the end of the twentieth century, Exxon merged with Mobil, still the biggest oil company and, for a time, the largest corporation in the world. In 2012, ExxonMobil has a market capitalization of almost $400 billion, second to Apple in market cap. Among the other 30 new companies were Standard Oil of California (Chevron), Continental Oil (Conoco), Atlantic Refining (ARCO and then Sun), SOHIO, and Marathon. Eventually, these separate companies became real competitors. Most merged to form even larger oil giants: ExxonMobil, ChevronTexaco, Continental now part of ConocoPhillips, and Atlantic Richfield and SO of Ohio now part of British Petroleum.

See also Antitrust; Corporations; Panic of 1873; Railroads, Nineteenth Century; Rockefeller, John Davison; Sherman Antitrust Act of 1890

References
  • Chernow, Ron. Titan: The Life of John D. Rockefeller, Sr. Random House New York, 1998.
  • Dobson, John. “John Davison Rockefeller.” In Bulls, Bears, Booms, and Busts: A Historical Encyclopedia of American Business Concepts. ABC-CLIO Santa Barbara CA, 2006.
  • Copyright 2013 by Gary Giroux

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