From the July/August 2012 issue of Inside Business
Rockefeller and his Oil Empire
By Michael D. Roberts
A young entrepreneur who became the world’s most famous tycoon started a big-time business brawl in Cleveland that had repercussions he never could have predicted. The city was the eventual loser.
In the annals of Cleveland business, no man was smarter, more controversial and made more money than John D. Rockefeller, whose vision and management style set the stage for a corporate America that became the envy of the world. Along the way, he became the wealthiest man in that world.An enigmatic fellow – religious, charitable, visionary, but in his own time portrayed as a greedy capitalist whose satanic reach reduced others to paupers – Rockefeller loved Cleveland until it betrayed him. He himself would say no other city ever abused him more than Cleveland.
The son of a flim-flam man who sold cancer cures, Rockefeller and his family moved to a farm in Strongsville from New York State in 1853. He attended high school in Cleveland and, after a stint at a business college, went to work as an assistant bookkeeper in a commission house that sold produce. That was in 1855, and he received $25 a month. He was 16.
Cleveland was burgeoning. The Ohio Canal had opened farm country, and grain and produce were being shipped up to the lake port. The railroad reached here in 1851 and the town was beginning to prosper and grow after a shaky start. By 1860, there were more than 40,000 people here, nearly half of them foreign-born, attracted by the prospect of a bright future.
Above all, Rockefeller was a quick study. Meticulous, fastidious and parsimonious, he had an extraordinary capacity to learn because of his curiosity, thoughtful temperament and a keen power of observation. So it was not surprising that in the spring of 1859, he opened his own produce commission business, Clark & Rockefeller. He was 19.
That same year oil was struck in Titusville, Pennsylvania, creating a boom not unlike the gold rush in California a few years before. Newspapers covered it and suddenly there was a surge in the creation of oil refineries. In Cleveland, there were 30 by the time the Civil War ended.
Even during the war, oil was the topic that consumed the business world. In those pre-automobile days, kerosene was the most useful product refined from crude oil. There was money to be made in kerosene, but it was a risky proposition. The business was full of turmoil and speculation with no discipline on either the production side or in the marketplace. The price of oil fluctuated wildly and there was so much overproduction that fortunes were made and lost over-night. In 1866 alone, the cost of a barrel of oil fluctuated between ten cents and $10.
Plus, there was suffocating competition. For as little as a $1,000 and a few workers, anyone could be in the refinery business. The key to success was in the refining technology and the transportation of the product. It was the transportation of oil where Rockefeller would apply his cunning and genius, and where he would ultimately be demonized.
Rockefeller and his partners in Clark & Rockefeller had cautious conversations about venturing into the oil business. Then one day they were approached by Samuel Andrews, a British-born, self-taught chemist and an expert in “illuminants.” He was looking for investors to open a refinery to produce high-quality kerosene for home and industrial lighting.
While maintaining his produce commission business, Rockefeller invested in a new company, Andrews & Clark, which would build an oil refinery. In 1863 he purchased three acres on the south bank of Kingsbury Run in the Flats. The refinery had a capacity of 30 barrels and employed 37 men with monthly wages that ranged up to $58. This site was to be ground zero of what later would be known as the Standard Oil Company.
Rockefeller was convinced that kerosene would take the place of other household lighting materials like tallow, whale oil and other petroleum products. Andrews’ ability to refine the crude into kerosene that would burn safely in the home was paramount.
Aggressive in his philosophy, Rockefeller wanted to build a company that would dominate and stabilize the oil industry. He was annoyed that some of his partners were satisfied with the status quo. When their differences became obvious, they met and discussed the future of the company. Not one to tarry, Rockefeller published a notice in the next morning’s paper dissolving the partnership. He bought out his astonished partners for $72,000.
Once fully engaged in the oil business, Rockefeller would daily stroll around the Kingsbury Run refinery with Sam Andrews, observing and asking questions, his boots covered with oil. He took an interest in every aspect of the business, from experimenting with new products, to barrel-making, to transportation. When leakage from the barrels became a problem, he bought the barrel company and with it a forest, thus solving the leakage problem and saving money in the process. Later, when the Standard Oil Company went into the retail business, he engaged in marketing.
Not only did Rockefeller develop an avid interest in oil, Cleveland did as well. New refineries were built almost daily by those who sought the fortunes that beckoned. By 1866, most of the kerosene made in Cleveland was being shipped to Europe, the world’s most lucrative market for the stuff.
Newspaper articles attempted to explain the arcane nature of oil refinement. They noted the different products refinement could produce, stressing that the least desirable was something called gasoline, which was dangerous and had little value. It was siphoned off into the Cuyahoga River where it sometimes caught fire.
Rockefeller formed The Standard Oil Company on January 10, 1870. At that time it controlled 10 percent of American oil production and was constantly acquiring more capability, buying out the competition. Rockefeller had a basic offer of either cash or stock in Standard Oil. In most instances Rockefeller would gently advise the seller to accept the stock. Later, many would rue that day they took cash, for those early stockholders became millionaires. Some of those who took the cash and later recognized their folly turned against Rockefeller and became part of the anger that welled up around him when his true method for eliminating the competition was revealed in the press.
The allegations were that Rockefeller put competitors in a position where they were forced to sell because he undercut them in price. Standard Oil was able to do this because it shipped most of its oil on the Atlantic & Great Western Railroad (later the Erie Railroad), which ran east through the Pennsylvania oil fields. Because Standard Oil was a preferred customer, it was able to secretly negotiate a transportation discount.
At one point, the going rail rates were listed as $2.40 a barrel but Standard Oil paid only $1.65, giving it a margin that leveraged a favorable price in the marketplace.
1872 was the year of Rockefeller’s all-out assault on his Cleveland competitors. It was known as the Cleveland Massacre. One can imagine Rockefeller’s soft voice advising his prey to take the stock rather than the cash, the seller knowing he was out of business one way or the other. All this took place at a time when most business was unregulated and that which was went uncontrolled.
The oil wars had an effect on Cleveland society. Many of those who Rockefeller forced out of business were notable figures in town who maintained magnificent houses on fashionable Euclid Avenue. Some were driven into bankruptcy by their exposure in the oil trade and had to sell their mansions. By age 33 Rockefeller had become the world’s largest oil refiner, taking his place among the richest men in America.
Five years after the Cleveland Massacre, the Standard Oil Company had become a global enterprise, which required Rockefeller and his family to move to New York where he would be closer to the international markets. Before he was 40 years old, Rockefeller had created the first international conglomerate – a company of loyal, productive employees who functioned in committees and carefully examined every challenge the company faced. His administrative skills were remarkable. He encouraged his employees to buy Standard Oil stock and he made money available for them to do so.
When he began to withdraw from the business in the 1890s he was making $10 million a year while the average American was making less that ten dollars a week. In 1902, he had an untaxed income of $58 million.
But as his wealth increased – almost unavoidably when the automobile came along and gasoline, for so long discarded, became a valuable commodity – he found himself increasingly criticized for unethical business practices and avarice. Muckraking reporter Ida Tarbell laid bare Rockefeller’s business practices in her incendiary 1904 book, The History of the Standard Oil Company, to this day considered a classic of investigative journalism. It was not until later in life that Rockefeller learned it might have benefited him to be more open with the press. But his silence had made him an easy target, and the damage had been done. The federal government had taken notice.
In 1907, a government investigation found that Standard Oil produced 87 percent of all kerosene in the U.S., handled 87 percent of exported kerosene and controlled 89 percent of the domestic kerosene market. The Justice Department filed an antitrust suit against the company.
When word came of the federal government’s verdict in the case later that year, Rockefeller was playing golf with a Plain Dealer reporter. He looked at the telegram, proclaimed to the reporter that he had a scoop and handed him the message that announced that the company had been fined $29,240,000. Rockefeller quietly resumed play.
Even though Rockefeller made his official residence in New York, he still returned to Cleveland regularly to spend summers at his spacious estate, Forest Hill, in East Cleveland. Yet, history clearly reveals that there was something that did not quite fit between Rockefeller and the city. For all his wealth and charity, Rockefeller was not part of the establishment, whose hierarchy had existed since Cleveland’s founding.
It was not that he was disliked in those circles; he just was not part of them. When he was under attack from the national press for his monopoly practices, Cleveland’s most prominent personages visited him at Forest Hill in a show of support. He was at one time the most hated man in America as well as its wealthiest.
But he was not without humor. Speaking one Sunday at the Euclid Baptist Church during his ordeal with the media, he excused himself saying, “I must stop, I’m monopolizing your time.”
And in the end, the trust busting had no impact on Rockefeller’s wealth. He owned about a quarter of the shares in Standard Oil and all its subsidiaries, which, under government mandate, were broken into individual companies. He maintained his stock position in the new companies, making him the richest man in the world with a net worth of $900 million. The federal budget that year, 1912, was only $716 million.
In retrospect, some believe that Standard Oil’s large economy of scale enhanced the oil industry’s development rather than hindered it. The company created an island of stability that saw the unit cost of oil cut in half because of the efficiencies introduced by Rockefeller’s methods.
Moreover, his impact on Cleveland was great. The wealth that Standard Oil generated in the city was immeasurable and the number of millionaires were too many to count. Other businesses sprung up here in support of the company. He donated millions to church, medical and educational institutions in town and made countless other gifts.
Then, in one of Cleveland’s classic blunders, county tax collectors, looking out for their political fortunes, cost the city an untold fortune.
In fall of 1913 Rockefeller’s wife, Cettie, took ill and the couple remained at Forest Hill past February 1, which was the tax deadline. Learning of his stay, county officials promptly billed Rockefeller $1,500,000. He refused to pay and the case went through legal proceedings until it was finally thrown out by the U.S. District Court. In the meantime, Cettie had died and Rockefeller was unable to bury her in Lakeview Cemetery for fear of being arrested at the funeral.
“Cleveland ought to be ashamed to look herself in the face when she thinks of how she treated us,” he said later. He was angry that while Cleveland institutions begged him for money, the “low politicians” were unfairly abusing him. Rockefeller felt that Cleveland was ungrateful for the wealth that Standard Oil brought to the city.
He left Forest Hill never to return. From time to time he would be solicited by some Cleveland organization, but he never felt the same about the city – although he insisted on being buried here, at Lakeview Cemetery, when he died in 1937. The animosity toward the city remained among his ancestors.
During his lifetime he contributed $3 million to the Euclid Avenue Baptist church, Alta House, Western Reserve University, Case Institute of Technology and the Cleveland Orchestra, as well as the land for Rockefeller Park and Forest Hill Park. These were modest gifts compared to what the city would have received had Rockefeller been more favorably disposed to his hometown.
In the end, he transferred his allegiance and charity to New York. One of his biographers noted: “How many New York hospitals, museums, and churches would be enriched by Cleveland’s blunder!”
A final irony: In 1991, after British Petroleum took over Cleveland-based Standard Oil of Ohio, the company briefly tarried in its Public Square office tower, then moved to Chicago.