John D. Rockefeller

John D. Rockefeller

JOHN D. ROCKEFELLER

John D. Rockefeller (1839 -1937) became the richest American of all time. He did this by creating the Standard Oil Corporation, which he made ultra-efficient through vertical integration and by using all “waste” or by-products of the business..

In Rockefeller’s time, the refining process was very primitive -- refining consisted simply of cooking the oil and purifying it somewhat. The physical plant was simple: some large vats, filtering equipment, pipes, and a few chemicals. A small refinery could be set up with just $10,000, and a large one with $50,000. In modern language, the barriers to entry were very, very low (this means it was cheap and easy to get into the business). As a result, there was a lot of competition. Kerosene was the most important product derived from oil at that time and competitors flocked in when the price of kerosene was high.Even though many failed when the price fell sharply, it was cheap to re-enter the business when times improved. To survive in this highly competitive market, Rockefeller became vertically integrated and made new products from waste. Standard Oil:

  1. owned its own cooperage (barrel making) plant, its own white-oak timber and drying facilities, and bought its own hoop iron. This allowed it to cut the cost of a barrel from about $3.00 to less than $1.50.
  2. manufactured its own sulfuric acid (used in the purification process) and devised technology to recover it for re-use.
  3. owned its own drayage (transport) service, consisting of at least 20 wagons in 1868.
  4. owned its own warehouses in New York City and its own boats on the Hudson and East Rivers to transport oil.
  5. owned its own tank cars (big wooden tubs mounted in pairs on flat cars) and was the first to use tank cars.
  6. built huge holding tanks near its refineries for storing crude and refined oil, with the equipment for drawing off the oil from the tank cars into the holding tanks.
  7. manufactured and sold new products from the “wastes” of the kerosene refining business, which included:gasoline (which many refiners dumped into the river, but which Rockefeller used for fuel); paraffin (for making candles, waterproofing paper, preservative coatings, etc.), and petrolatum (used as a basis for ointments and later marketed under the brand name Vaseline.

The sheer size of the business and the fact that Cleveland was served by two railroad systems gave Rockefeller tremendous leverage with the railroads. He was able to negotiate big rebates from the railroads and eventually by-passed them altogether when he built pipelines.

In Rockefeller's eyes, the state of the oil business was chaotic. Because entry costs were so low in both oil drilling and oil refining, the market was glutted with crude oil with an accompanying high level of waste. In his view, the theory of free competition did not work well. His view was that the weak firms, in their attempts to survive, drove prices down below production costs, hurting even the well-managed firms such as his own.

His solution -- a market with one large, vertically integrated firm--was what other industrial sectors eventually evolved into. Rockefeller consolidated or combined all oil refining firms into one great company. He began by buying up all competitors in Cleveland and offered them Standard Oil stock for their property. In return, they became partners and profited from Standard’s success. This exchange of stock for their property was done in secret; on the surface it appeared as if the companies remained in business under their own name. But in reality, they were controlled by Standard Oil.

By 1890, Standard Oil had set up an elaborate nationwide distribution system that reached nearly every American town. By 1904, 80% of American towns were served by Standard Oil carts that delivered the various products directly to businesses and homes. Standard controlled 90% of all oil production in the U.S.and tried to force all grocery and hardware stores that sold kerosene and lubricants to sell only Standard products. Eventually, Standard Oil’s dominance of its industry and its use of secret stock exchange agreements (which became known as trusts) that left all power in Rockefeller’s hands led to a backlash against the company. Standard Oil became the great symbol of the evils of monopoly power.

After 1890, Rockefeller turned his attention mostly to philanthropy. Among his activities were:

  • creating The University of Chicago
  • Creating the Rockefeller Institute for Medical Research (now Rockefeller University),a premier medical research facility.
  • founding the General Education Board in 1903 (later the Rockefeller Foundation), which helped to establish high schools throughout the South.
  • establishing the Rockefeller Sanitary Commission which was largely responsible for eradicating hookworm in the South by 1927.

When Rockefeller died, on May 23, 1937, his estate totaled only $26 million, down from the $900 million he had at the height of his career. He had given most of his fortune away. But his reputation was so tarnished by his monopoly tactics that he never received the credit he deserved for his gifts on behalf of humankind.

Note: This biography of John D. Rockefeller Sr. was written by Keith Poole, Professor of Political Science at the University of Georgia

Answer on separate paper.

  1. What evidence do you have that Rockefeller’s company was vertically integrated?
  2. What besides vertical integration did Rockefeller do to cut costs of production?
  3. Compare Rockefeller’s philanthropic activities with Carnegie’s.
  • How are they similar?
  • What do you think was Rockefeller’s greatest philanthropic achievement?