Rockefeller and Standard Oil Flashcards
Overview
Growth via combination, consolidation and integration
power derived from scale economies and from power leverage over transportation
Oil Industry Background
little capital was required to enter the industry
rule of capture: a well owner could extract as much oil as possible
suffered from uncertainties of production. both price and supply fluctuated wildly (to stabilize price: cartels)
Business organizations in the oil industry (early days)
most business units were small and acted individually
Conquest of Cleveland
refineries in Cleveland largest in the country
1870: Standard Oil became a corporation
buying out cleveland competitors, paid through an exchange of stock (not in cash)
permitted competitors to profit from Standard’s growth
Advantages
technological innovations in the industry
reduced unit cost of production
faciliated access to short-term loans from commercial banks to cover operating expenses
greater leverage with railroads
National Refiners Association
Cartel formed in 1872
difficult to maintain a cartel because you need to control everyone
Collapse
Instead: Standard Oil combination
Pipeline revolution
could carry crude oil over long distances at a far lower cost in much greater volume
Broke Standard’s monopoly over long-distance transportation
Trust
Standard Oil Trust (1882)
Centralized administrative structure
expand pipeline network through all refineries
Standard’s move into crude oil PRODUCTION
good location: near producing areas and near trains
lots of demand but production hard to increase (price increases)
How did Rockefeller conquer Cleveland?
leverage over transportation and over banks (you are larger so you can easily have loans at lower interest rates)
Given Standard’s enormous power by the late 1870s, how might it have been attacked successfully?
by finding a new transportation system to cut the leverage
