Standard Oil Part I

In the late 19th century, John D. Rockefeller's Standard Oil epitomized the American industrial boom, transforming from a regional oil refinery into a national behemoth controlling 90% of the oil business. Pioneering innovative structures like trusts and joint stock companies, Standard Oil leveraged economies of scale and strategic partnerships with railroads to dominate the industry. Despite public outcry over its monopolistic tactics, the company's aggressive expansion and efficiency drove down kerosene prices, benefiting consumers. Rockefeller, balancing a ruthless business acumen with a deeply religious philanthropic drive, believed consolidating the volatile oil market was a moral imperative. Standard Oil's legacy, both controversial and celebrated, set the stage for modern corporate America and antitrust legislation.

• Ben Gilbert and David Rosenthal introduce the episode, focusing on Standard Oil.
• Standard Oil was founded in the 1870s by John D. Rockefeller.
• The company was a monopoly that controlled the oil industry and was later broken up into several companies.
• The episode will explore the history and impact of Standard Oil.

"Welcome to season nine, episode four of acquired, the podcast about great technology companies and the stories and playbooks behind them. I'm Ben Gilbert, and I'm the co-founder and managing director of Seattle based Pioneer Square Labs and our venture fund, PSL Ventures." "And I'm David Rosenthal, and I am an angel investor based in San Francisco."

These quotes introduce the hosts and the focus of the episode, setting the stage for a deep dive into the history of Standard Oil.

• John D. Rockefeller founded Standard Oil, which was not initially involved in gasoline production.
• Standard Oil predates the Ford Model T by about 40 years.
• The company's influence persists, with modern companies like Exxon and Mobile tracing their origins back to it.
• Rockefeller became the wealthiest person in modern history before the gasoline boom.

"Well, this episode on Standard Oil is, of course, the oil monopoly, founded in the 1870s by John D. Rockefeller, the wealthiest person in modern human history."

This quote highlights the significance of Standard Oil and Rockefeller's role in its foundation and dominance in the oil industry.

• Standard Oil's financials were kept secret, contributing to its later scrutiny and breakup.
• The company played a significant role in creating the modern energy industry.
• The episode will explore the many stories surrounding the company's history.

"At least the standard oil that we will cover today never ipoed. It was privately held the whole time. Its financials were kept very secret."

This quote explains Standard Oil's secretive nature and its operation as a privately held company, which is a crucial point in understanding its eventual antitrust issues.

• Accounting and finance were critical to Standard Oil's operations.
• The hosts discuss Pilot, a company providing accounting, tax, and bookkeeping services, and its relevance to startups and growth companies.
• The discussion underscores the importance of professional financial management in business.

"Every company needs it. It needs to be done by a professional. You don't want to take any risk of anything going wrong, but at the same time, it has zero impact on your product or customers, things you do uniquely well."

This quote emphasizes the necessity of proper accounting and financial management for companies, which is an underlying theme in Standard Oil's meticulous approach to business operations.

• John D. Rockefeller's father, William Avery "Devil Bill" Rockefeller, was known for his questionable practices and influence on his son's views on money.
• Rockefeller's mother's devout Christian beliefs also shaped his perspective on wealth and duty.
• Rockefeller saw making money as a divine duty and intertwined this with his philanthropic efforts.

"I believe the power to make money is a gift from God, just as are the instincts for art, music and literature, to be developed and used to the best of our ability for the good of mankind."

This quote from Rockefeller reflects his belief in the divine nature of wealth creation and his perceived duty to use his financial abilities for the betterment of humanity.

• Rockefeller moved to Cleveland and began his career as a bookkeeper, eventually becoming a partner in a merchant trading firm.
• The Civil War increased demand for commodities, leading to significant profits for Rockefeller's firm.
• Rockefeller and his partner ventured into the oil refining business, capitalizing on the burgeoning demand for kerosene.

"He gets to work. He becomes basically, like the best bookkeeper that history had seen before, since at least until Pilate."

This quote illustrates Rockefeller's meticulousness and proficiency in accounting, which played a pivotal role in his business success and the management of Standard Oil.

• The discovery of oil in Titusville led to the rise of the oil industry, with kerosene becoming a critical product for lighting.
• Rockefeller and his partner invested in oil refining, recognizing the potential of the industry.
• The strategic location of their refinery in Cleveland allowed them to capitalize on transportation routes for oil distribution.

"They start trading a little bit in this. Clark and Rockefeller, they start making some profits."

This quote indicates the initial forays of Rockefeller and his partner into the oil trade, which would eventually lead to the establishment of Standard Oil and its dominance in the industry.

• The oil industry was characterized by a gold rush mentality with little concern for optimization or efficiency.
• Refineries in places like Cleveland were set up to capitalize on the burgeoning oil market.
• There was a high-margin opportunity as oil was just "flying out of the ground."

"People that are setting up refineries in Cleveland and elsewhere, but they don't care about optimization. They don't care about efficiency. They're just like, look, hey, it's a gold rush. Give me the gold, and I'll just take as much of it as possible. If it goes away tomorrow, that's fine." "Yep, high margin dollars just flying out of the ground."

These quotes illustrate the early oil industry's focus on rapid gains without a long-term strategy, comparing it to a gold rush where immediate profits were prioritized over sustainable growth.

• The oil market experienced significant price fluctuations.
• Prices were heavily influenced by rumors and speculation.
• The discovery of oil and beliefs about potential finds impacted market behavior.

"All of this, the behavior of the other folks, this causes huge gyrations in price. Like it really is. It's like the early days of bitcoin."

The quote compares the early oil market's volatility to the unpredictable nature of the early cryptocurrency market, emphasizing the instability and rapid price changes.

• John D. Rockefeller had a long-term vision for his oil business.
• He focused on profit reinvestment, expansion, and efficiency.
• Rockefeller's strategy included buying out competitors during price crashes.

"So Rockefeller, though, he's just got this vision where he's like, oh, man, the more profit I make, the more money, the more capital I can put into this."

This quote highlights Rockefeller's strategic approach to reinvesting profits for growth and expansion, contrasting with the short-term focus of his competitors.

• Rockefeller vertically integrated by hiring in-house specialists and acquiring resources like forests for barrel production.
• He horizontally integrated by aiming to become the sole supplier of oil.
• The focus was on controlling the entire supply chain and reducing costs.

"And we should say, when we say he's tweaking stuff, he's so much more profitable. He is both horizontally and vertically integrating."

The quote emphasizes Rockefeller's comprehensive approach to integration, which made his operations more profitable by controlling multiple stages of production and distribution.

• Rockefeller's partner, Clark, was uncomfortable with the amount of capital tied up in the business.
• Rockefeller engineered a coup to take over the partnership by cleverly baiting the Clarks into dissolving it.
• He secured financing from banks and outbid the Clarks to gain full control.

"Clark was an old grandmother and was scared to death because we owed money to the banks."

This quote reveals the differing attitudes between Rockefeller and his partner Clark, with Rockefeller being more aggressive and willing to take on debt for growth.

• Standard Oil was established as a joint-stock company with substantial capital.
• The company quickly became profitable, paying out large dividends and reinvesting in growth.
• Rockefeller's business practices were innovative, focusing on equity and dividends.

"On January 10, 1870, they abolish the old partnership, and they pour all of its assets into the new joint stock company, the standard Oil company of Ohio."

This quote marks the official establishment of Standard Oil, which was a significant milestone in the creation of modern corporate structures and practices.

• Flagler introduced the joint-stock company model to enable interstate operations.
• Standard Oil created a trust to control other companies and circumvent state laws.
• The trust allowed for dividends to flow to shareholders without involving the company directly.

"It's financial and corporate law. Innovation."

The quote succinctly captures the essence of Standard Oil's approach to overcoming legal and financial barriers, which was innovative for the time and laid the groundwork for modern corporate expansion.

• Rockefeller argued that expanding Standard Oil's operations was beneficial for consumers.
• He believed in providing quality products at lower prices, improving quality of life.
• The expansion was framed as a societal good, despite potential harm to competitors.

"This is for the betterment of consumers. Now, my competitors, when I move into these states, probably don't like it, but ultimately the american public wins."

This quote reflects Rockefeller's justification for Standard Oil's aggressive expansion, portraying it as a win for the American public through better and cheaper products, despite the competitive tactics used.

• Ben Gilbert and David Rosenthal introduce StatSig, a company providing feature management and experimentation tools for product teams.
• StatSig is offering listeners a chance to collaborate with them.
• Listeners are encouraged to mention Ben and David when signing up with StatSig.

"You can click the link in the show notes or go on over to statsig.com to get started. And when you do, just tell them that you heard about them from Ben and David here on acquired."

The quote is a direct call to action for listeners to engage with StatSig, highlighting the partnership between the company and the podcast hosts.

• Crusoe is a clean compute cloud provider tailored for AI workloads.
• They have a partnership with Nvidia and use energy-efficient data centers.
• Crusoe's data centers utilize stranded or clean energy, offering better performance per dollar than traditional cloud providers.

"Nvidia is one of their major partners, and literally Crusoe's data centers are nothing but racks and racks of a because Crusoe's cloud is purpose built for AI and run on wasted, stranded or clean energy, they can provide significantly better performance per dollar than traditional cloud providers."

This quote explains Crusoe's business model and its focus on AI cloud services powered by energy that would otherwise be wasted, emphasizing their cost and performance efficiency.

• Crusoe's data centers are located at stranded energy sites, such as oil flares and wind farms.
• Utilizing power that would otherwise be wasted benefits the environment and reduces energy costs for customers.
• Energy cost savings are passed on to customers, making it financially advantageous to use Crusoe's services.

"Obviously it's a huge benefit for the environment and for customers on costs, since Crusoe doesn't rely on the energy grid."

The quote highlights the dual benefits of Crusoe's approach: environmental impact and cost savings for customers.

• Standard Oil created a shell corporation called South Improvement Company.
• The scheme involved cooperation with major railroads to control oil shipping rates.
• Members of the South Improvement Company would receive discounted shipping rates and kickbacks from competitors' shipping revenues.

"They set up a shell corporation called the South Improvement Company...Standard Oil is going to set up and control most of the south improvement company through their new trust and joint stock corporation structure."

The quote describes the formation of the South Improvement Company as a strategic move by Standard Oil to consolidate control over oil shipping.

• Railroads faced unpredictable demand and intense competition, leading to profit losses.
• Standard Oil's cooperation offered a solution to stabilize the railroad industry.
• The scheme aimed to fix prices to create predictability and alignment of interests.

"We ascribe no virtue to this. I think the jury on this whole thing, and we'll get to this later in the episode, and certainly in part two of, like, what parts of this were good and what parts of this were bad? It's both."

This quote reflects on the moral ambiguity of the railroad industry's predicament and Standard Oil's proposed solution, acknowledging both positive and negative aspects.

• Standard Oil used the South Improvement Company to coerce other refiners into selling their operations.
• The company rapidly expanded, acquiring numerous refineries in a short period.
• By 1877, Standard Oil controlled 90% of the oil business in America.

"From February 1872 to April 1872, Standard Oil buys 22 of the 26 other refineries that are operating in Cleveland."

The quote details the aggressive expansion strategy of Standard Oil, which led to its dominance in the oil industry.

• Standard Oil developed a leasing model for tank cars, gaining leverage over railroads.
• They could threaten to withdraw tank cars, effectively controlling railroad operations.
• This strategy ensured favorable shipping rates for Standard Oil.

"As the owner of almost all the Erie and New York central tank cars, Standard Oil's position grew unassailable."

This quote explains how Standard Oil secured a dominant position over railroads by controlling the essential tank cars used for oil transportation.

• Standard Oil adopted pipeline technology after initially resisting it.
• They leveraged their relationship with railroads to build pipelines along railroad land.
• This strategic move served as a reminder to railroads of Standard Oil's alternative shipping method.

"Standard oil goes to the railroads... and they're like, my friends, we've got this really exciting new thing that we're working on."

The quote describes Standard Oil's cunning use of railroad land to build pipelines, further cementing their control over oil transportation.

• Standard Oil's monopolistic practices led to public outcry and government scrutiny.
• The Sherman Antitrust Act of 1890 aimed to curb monopolies but lacked clear definitions.
• Rockefeller viewed the act as a political win, maintaining his influence and operations.

"The act that ends up bringing them down, he is the biggest or one of the biggest donors after the act passes to the senator that introduces it."

This quote illustrates the complex relationship between Rockefeller, Standard Oil, and the political forces attempting to regulate monopolies.

• In 1896, Rockefeller retired to focus on philanthropy, leaving Standard Oil in capable hands.
• Standard Oil's influence continued to grow, even as the company faced potential legal challenges.
• Rockefeller's philanthropic endeavors and personal life would shape his legacy in American history.

"In 1896, Rockefeller is like, well, guess it's been a good run. I'm going to hang it up."

This quote marks the transition of Rockefeller from active business leader to philanthropist, setting the stage for the next chapter of his life and the Standard Oil story.

• The individual in question did not completely dissociate from the company.
• Retained a title and presence, which kept him in the public eye and susceptible to legal scrutiny.
• The public did not perceive his role as fully relinquished due to continued association with the company.

"But key mistake. He didn't fully leave." "He's like, well, just entitle, only I'll kind of stick around as president, right? Or as chairman."

The quote emphasizes the error in not fully detaching from the company, as retaining a title like president or chairman keeps one involved in public and legal matters.

• Public sentiment was influenced by competitors and others affected by the company's business practices, rather than by the general public.
• Competitors and those coerced into cooperation, such as railroads and retailers, harbored resentment.
• The public's perception of monopolies was historically negative, tracing back to the founding principles of equality and free markets in America.
• Rockefeller defended his company by arguing against social Darwinism and for the benefits of a standardized, trustworthy product.
• He believed in the necessity of consolidating the industry to prevent the collapse of businesses and to ensure consumer trust.

"So even there's this interesting, very American stripe that runs through people. That is, I can't quite put my finger on why, but I don't like big stuff and I don't like concentration of power."

The quote reflects the ingrained American distrust of large entities and concentration of power, a sentiment that affects public perception of monopolies and large corporations.

• There is a long-standing skepticism among Americans toward centralized government power.
• This skepticism extends to any form of concentration of power, whether in government or among the wealthy.
• This cultural trait influences national conversations to the present day.

"Well, and still to this day, there's like huge skepticism amongst Americans of centralized government power, right?"

The quote highlights the enduring American skepticism toward centralized authority, a sentiment that continues to influence attitudes toward government and large corporations.

• Rockefeller believed that the free market’s invisible hand was inefficient and could lead to hardships.
• He viewed social Darwinism and unregulated competition as harmful to industries and consumers.
• Rockefeller positioned Standard Oil as a necessary intervention to stabilize the industry and protect it from destructive competition.

"It's this interesting, uniquely American viewpoint on actually social darwinism and free market. Capitalism is a bad thing."

The quote captures Rockefeller's perspective that unbridled capitalism and social Darwinism were detrimental, thus justifying his approach to business.

• Rockefeller's approach was likened to saving businesses in an "evangelical Christian way."
• The aggressive consolidation tactics, while positioned as benevolent, raised ethical concerns.
• The company's influence extended beyond reasonable boundaries, leading to coercive practices against competitors and partners.

"You come into the light and embrace the standard oil."

The quote metaphorically describes Rockefeller's strategy to consolidate the industry under Standard Oil, likening it to a religious conversion.

• The company's branding and logo became iconic, with the torch symbolizing light and power.
• Standard Oil's legacy and Rockefeller's persona set the prototype for American culture's view of wealthy entrepreneurs as both villains and heroes.
• Rockefeller's image evolved from reclusive to more public-facing, as he recognized the need for positive public relations.

"But like, everything that I feel like the public feels about, you know, like everybody, all these billionaires, like, this was the prototype."

The quote suggests that Rockefeller's public image as a wealthy entrepreneur set the stage for how Americans perceive modern billionaires, a mix of admiration and criticism.

• Standard Oil demonstrated all seven powers outlined in Hamilton Helmer's book: counter-positioning, scale economies, switching costs, network economies, process power, branding, and cornered resource.
• Scale economies were identified as the most significant factor in Standard Oil's success.
• The company's strategy involved leveraging these powers to dominate the industry and achieve unprecedented scale.

"I think Standard Oil at various points in its 1st 2025 years of existence, exerted every single one of these."

The quote indicates that Standard Oil exemplified all the strategic powers that contribute to a company's dominance, with scale economies being the primary driver.

• The discussion explores how Standard Oil's value creation for the world compared to the value it captured for itself.
• The company's practices aimed to capture as much value as possible, often at the expense of consumer surplus and fair competition.
• By the turn of the century, Standard Oil's profits represented a significant portion of the U.S. GDP.

"But I think the way I would sort of look at this one and talk about this is you can tell from the business practices that we've harped on this entire episode that every time they created value, they looked around to capture every single scrap of it that they possibly could rather than let consumer surplus exist or their competitors participate in the upside that they were creating or partners."

The quote reflects on Standard Oil's aggressive approach to capturing value, often to the detriment of others in the industry and potentially consumers.