Standard Oil Part I

Transcript from https://podmenti.com/t/769baa46da7fc2b8

So
History and facts going up through
eighteen ninety.
Who got the truth?
Is it you, is it you, is it you Who got the truth now?
Is it you, is it you, is it you?
Down
straight another story

Welcome to Season 9, Episode 4 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.
And we are your hosts.
Today's episode is one hundred and fifty years in the making.
David, somehow we missed this IPO, if or when it happened. Can we still get secondary shares? Put together a little SP V. I think it might be of a spin off or something like that at this point. Uh okay.
At least
The standard oil that we will cover today.
never IPO'd. It was privately held the whole time. Its financials were kept very secret.
That must be why we've have missed it until now, David, surely. Uh yeah, must be. Must be.
Well, this episode on standard oil is, of course, the oil monopoly founded in the eighteen seventies by John D. Rockefeller.
the wealthiest person in modern human history.
Embarrassingly, until I had started to do the research, I didn't realize the oil in standard oil did not refer to gasoline, at least until much, much later in the life of the company.
Automobiles.
Model T was like nineteen ten or so.
Totally. Standard oil predates the Ford model T by like forty years. Yeah.
John D.
becomes the wealthiest person in like
Modern human history.
Before gasoline.
This is a different kind of oil.
Yeah. Gasoline helped later. Turns out compounding can kinda show up, especially when the second business line gets layered on top, but
We will get into it.
Listeners, the other thing that is crazy that I want to point out, I didn't realize how much standard oil is very much with us today, despite being famously broken up.
the parts went on to become both Exxon and Mobile.
Marathon.
Amaco, which of course is now a part of BP, Chevron, and several other companies. When you look at a gas station, you are probably looking at some remnant of standard oil.
Just wild.
So this one will be at least a two parter. It turns out the company responsible for creating the entire modern energy industry has a lot of wild stories.
All right listeners.
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All right, well, listeners, before David takes us in, as always, this show is not investment advice. David and I may have investments in the companies we discuss. Unlikely in this case.
This is for information, entertainment.
Let us know if you find the standard oil stock ticker.
We'd love to go check it out. No.
Without further ado, standard oil.
Maybe Pitchbook has some data on them.
All right.
I would just want to give a lot of love.
To Ron Chernell.
Who is one of like America's greatest
Historians, biographer of Hamilton.
He wrote the book that Hamilton's based on, the Player.
Titan.
The definitive biography.
Of John Davis and Rockefeller, that is the main source for this episode. It's so good. It's so
Good.
And uh
I think the perfect place to start is with one of Turnow's quotes at the very beginning in the introduction to Titan.
Where he says the story of John D. Rockefeller
Transports us back.
To a time.
When industrial capitalism was raw
and new in America.
And the rules of the game were
Unwritten.
Have scatter.
I think more than anything we've covered on this show
Standard Oil wrote the rules. The way business is done. The way business is done. The unwritten rules.
They wrote the unwritten rules.
And then
You know.
Congress. Right.

the era that we should think of here, you know, this isn't the wild, wild west. This is the wild wild east.
were thirty, forty years after our nation was founded here in the early eighteen hundreds, the freaking civil war hasn't even happened yet.
Nope.
No Texas, no California. Yeah, certainly early in corporate law, but or early in like all forms of human organization in the United States. Law what is law? Uh speaking of. Okay. So we start in eighteen ten.
in Ankram, New York, which is actually like not that far from Manhattan.
But back in those days was
A different world.
We start there with the birth of William Avery Rockefeller.
Big Bill.
He would also go on to have a another nickname.
His other nickname was Devil Bill. Not as good. He got because of his profession that he would grow up to, um

John Rockefeller's father here.
Devil Bill.
Big Bill.
Was literally
A snake oil salesman.
You know, like people use the term like oh like uh you know oh Ben, he's a snake oil salesman. Like This is where the term comes from. He sold medicines out of his like pack that he rode into town on a horse that like professed to be a doctor, but
Didn't do anything and then he got out of town before anybody.
Realized.
So one day.
When he is
twenty six old.
in eighteen thirty six.
He rolls into a new
unsuspecting community to offload his uh goods.
On, shall we say.
Richford.
New York.
Far, far, far away in
Central New York State.
Dare.
He encounters
The Davison.
Family.
The Davisons are quite unlike
Bill and
Uh Rockefeller.
Clan. They're upstanding.
They are upstanding. They are.
Devout.
Religious
Christian followers.
They have a different moral compass than Bill, shall we say. Well, yeah, and they're wealthy.
That is the other thing. They are
Quite wealthy, so
Bills, wild bills, young bills, big bills.
Eyes light up when he
Sees the Davison ranch.
And he uh
So the story goes. I think this is actually true. One of his like sort of tricks of the trade, if you will, was he would pretend to be deaf.
And he would carry like a chalk slate around his neck and write on it and pretend to be deaf and couldn't speak.
And he's at the Davison house and he's you know doing this little charade.
Annie here is the second eldest daughter.
of the Davisons.
Woman named Eliza.
Pretty young girl say uh
I would marry that man if he weren't.
Deaf and dumb.
And miraculously Oh my God.
The beauty of young Eliza cures Bill of his affliction and he can speak and he can hear
Amazing.
So
the uh patriarch of the Davison family one John
Davison.
Remember that name. Uh he's a little suspicious of what's going on here, but nonetheless
Bill.
Who is Eliza and
They are.
Married.
Shortly thereafter.
They get married.
Day.
Settle down, you know, Bill builds a house. Shack like literally people like
Nope. There.
houses back then, uh a little ways down the road.
Bill's like, Well, we need a housekeeper here.
And I've got this old, you know, friend Nancy.
Why don't we have Nancy move in with us and be our housekeeper. Well it turns out Nancy was his
Girlfriend. Yeah, oh this old friend, you know, she could help with the kids.
The housekeeping.
Alright, so we're painting the picture here like you've got this unbelievable swirling concoction of
well to do, religious, by the book mom side of the family.
Dad's side of the family.
uh not quite as uh upstanding of a human being.
But here they mix.
And
One.
July evening all of these forces swirl together.
And july eighth, eighteen thirty nine.
Eliza
Gives birth to her second child.
It's the first sun.
They decide to name this child after Eliza's father.
It was John Davison. They named the boy John.
Davison.
Rockefeller. Uh and oh boy, does little JD
Have a lot of both John Davison.
And Wild Bill Rockefeller.
In him.
So
On the Rockefeller side.
Little John is like totally captivated, totally dotes on him. He thinks he's
The best.
He would even for the like the rest of his life, Rockefeller would intensely defend his father.
Sure now.
Would rate.
That in no area
Did Bill impress his eldest son more or did his eldest son prove more impressionable than
than in the magical realm of money.
Big Bill had an almost sensual love of cash.
And enjoyed flashing plump rolls of
Bills.
And indeed one of Bill's companions at the time would say of him.
Quote, the old man had a passion for money that amounted almost to a craze. I never met a man who had such a love of money.
Except of course for his son in the future. And this is where we start to get into the ways in which his son would become like him, but different.
And the like him is of course in this
love for making as much money as possible.
the way in which it is different, you know, Bill would come back from these trips and he would have a fat wada cache and he would take the hundred dollar bill and he would put it on the outside. You'd make sure that everybody knew that there was at least one, maybe lots of hundreds in this fat wada cache.
Whereas John D would grow up.
and detest shows of wealth. I mean the smallest house on the nicest street in Cleveland.
He mixes his mother's side of the family into these lessons from his father. Oh totally. Well, so speaking of, you know, his mother
The Davisons were.
Baptists.
And that was
Well, not unique, but pretty different than
some of the original Protestant groups that had come to America, you know, a generation or two before.
The Baptists you think like church revivals, you think like
Big
Showy theatrical.
The whole point was to evangelize and to recruit. They didn't think that they were like the chosen people that were going off to the new land to be by themselves like.
No, no, we're gonna take over the world here. We want
Everybody.
On.
It was an evangelical religion. So here's where
These two sides of John's maternal and paternal
Sides here seem like oil and water.
Oil and butter. David.
They're not.
The Baptists are all about the money. They think money is also
Great.
They just think it's great for a different reason, which is that the more money, the more influence
The more
Followers we can recruit into.
The fold.
And
This
Also has a huge impact on J D.
He would say later, quote, 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.
Having been endowed with the gift I possess,
The gift to make money.
I believe it is my duty to make money and still more money and to use the money I make.
For the good of my fellow
Man.
Boom.
I mean
Duty. He heard the word duty in there.
about making money that it is God has
asked him to go forth and make as much money as humanly possible.
It is this incredibly unique thing.
about John D. Rockefeller where
When you describe him as
One of the wealthiest.

and a philanthropist. It's very different.
than the way that you would describe today's billionaires as
wealthy people and it's not one then the other. It's not career and then philanthropy.
John D held these things to be intertwined, that he should go make as much money as possible, and to be simultaneously incredibly philanthropic.
And the purpose of making this money.
was to be phanthropic, as if he were a better
charitable allocator than anybody.
Wealth.
Power, control, philanthropy, impact.
John D makes.
Bill Gates or Mark Zuckerberg look like that.
Children. Like it's wild.
So
In eighteen fifty three.
When John is fourteen and just on the
Yeah.
Bill swoops in, comes back from one of his trips.
And decides, announces that he is gonna move.
The family.
Away from New York.
Two.
Ohio specifically.
Two
Strongville.
Which
Then it's you know it's
Right next to Cleveland.
For sure. Strongsville, Ohio. It's uh one of many wonderful suburbs of the Cleveland area.
Yeah. This is like your homecoming this episode.
It's true. Like a lot of this episode takes place in places that that were within like a half hour drive of where I grew up.
Mm.
So great.
So
The stated reason for the move is that Bill wants to, you know, go open new territories for his business.
But there's actually another reason, which is uh he's got another new girlfriend back in New York named Margaret.
And he wants to keep
The family's more.
Separate.
But he wants to marry this new girlfriend and he's kinda thinking he's like, This is the world that America was back then. He's like, Well, if I just get like a state border between the two of them, great, I don't see why I can't have
Too wide. It's true. There's no internet. State registries are probably pretty hard to go look something up in a different state.
So they moved to Ohio.
And at first
Before Bill marries.
His second wife.
Concurrently. Margaret.
He sends John and his little brother William.
To a boarding house in Cleveland to go to
Like a real high school in Cleveland.
And that that goes on for about two years.
And then when Bill actually marries Margaret
He sends a letter to John
And says
You know this uh schooling thing and the well well plans have changed and I uh
I can't really pay any more for
You and William to go to school, so
I'm basically deputising you now as head of household. And uh you're gonna have to drop out.
And get a job in.
Find a way to support the family.
Best of luck, son. Talk about wild thing to just
hear and totally hijack your life plans.
Totally. This really was not.
What John was planning, but
He decides remember he's got this love of money, he's like, Well, what can I do to make money? Well what if I
Stay close to the money.
So he pays forty dollars and does a three month crash course over the summer.
N.
Bookkeeping.

And
decides that he's gonna
become a bookkeeper and this is gonna be his path to supporting the family.
Ever the sensible fellow when he
finishes his training and he he's off to go get a job.
He
Decides that the way he's gonna job search.
Is he gets a directory.
Of all the businesses in Cleveland.
And
Hm.
looks up what their credit ratings are and decides that he's only gonna
Target the ones with the best credit ratings. He's smart.
You know, he wants to be close to you may as well.
Only be a part of businesses with the best access to capital.
Strength leads to strength, right? So
The story goes that he pounds the pavement for six weeks, he goes to every firm on his list, they all reject him.
But he's undeterred.
And he just starts back up at the top. So he goes to see all these companies like at least two, some of them three times.
Finally.
One.
Company.
Partnership of Hewitt.
And Tuddle.
They probably just get so tired of
This little kid, the sixteen year old kid banging on their door that they're like, All right.
Fine. You can start. You can you can work here. You can be a junior bookkeeper.
This happens on September twenty sixth, eighteen fifty five.
I get this for the rest.
of Rockefeller's life.
He celebrates september twenty sixth.
As his job day. I love this. Like more sacred than the birthday. Job day was the day it's like the day he was
Baptized into capitalism by being able to make money in the world.
Absolutely. And literally it's like this is the big deal every year in his life. Like it's bigger than the birthday.
It's it's job day. Except he's you know, he's starting in labor, not in capital, but
He makes the transition pretty quick, don't worry.
So he gets to work.
He becomes basically like the best bookkeeper.
That history had seen.
Before or since, at least until Pilate Turn out writes about this.
John.
betrayed a special affinity for accounting and an almost mystic faith in numbers.
For Rockefeller, ledgers were sacred books that guided decisions and saved one from fallible
Emotion.
Well, of course they're sacred.
The numbers in the books are money. It's the divine, you know, God given path to be close to the money and get as much of it as possible.
Absent the divinity, this is very Buffet esque. I mean, at a young age, having this sort of respect and obsession with the numbers.
Supposedly.
When John was a younger kid.
He would also like go to the general store and buy like a big block of candy.
And cut it up into little pieces and then sell the little pieces or other kids. Yeah, just like Buffett and uh Gum, right?
Yeah. This sticks again.
Yeah.
So he goes to work in this farm. Now what is Hewitt and Tuttle?
They are
A merchant
Trading.
Firm that specializes in
And
Produce commodities.
Like foodstuffs, like things that
People would eat, you know, meat
Vegetables, produce stuff that's coming off of the
Farms.
going into cities like Cleveland, I assume they mostly dealt in foodstuffs that came into Cleveland to then be
Sold in stores and consumed by the newly rising urban populace.
So
John D is
rising quickly through the ranks, pretty much immediately they give him a fifty percent raise'cause he's doing
So well, even his little kid.
in the beginning of eighteen fifty seven, uh so not quite two years after
John joins the firm, Tuttle, the junior partner, leaves to go seek his own fortunes.
Help from uh under the thumb of the senior partner.
And Hewitt's like, all right, well, John, you're you're my new uh
Partner. Not partner, but you know, you're you're gonna take Tuttles.
Roll.
Yeah.
John.
Is like
Well that's nice. Are you gonna pay me like a partner? And uh he went like
Dude, you're like 17 years old. Like no.
John is undeterred, though.
This is pretty crazy. So
He's like head of household supporting his family. He's already making a lot of money.
He's got this great.
Roll.
But the next year.
In eighteen fifty eight.
He's like I think I you know, I'm doing the work of a partner in a merchant trading firm.
I'm gonna go be a partner in a merchant.
Trading firm.
So he hooks up with a much older
gentleman named Maurice Clark that he had met
doing his bookkeeping training.
And they go in fifty fifty on a new
Merchant firm called Clark.
Rockefeller.
And like doing the same thing, still produce and meats and trading foodstuffs. Exactly foodstuffs produce.
Things go like okay.
At first for a couple years.
What is this like eighteen fifty nine sixty? Yeah, fifty nine, sixty.
They managed between the two of them to put four thousand dollars in capital into the firm to start the trading operations, which like was a lot of money.
And Rockefeller put in half of it.
It wasn't Rockefeller like finding ways to borrow from Devil Bill. Devil Bill definitely had his sticky fingers in all this, that is for sure.
So things go like okay, but they have some losses. They actually have to bring in a third partner.
I think in
eighteen sixty.
to sort of shore up some losses and bring more capital into the firm.
And just to put a point on that, the reason the capital's so important is they basically need to
have enough on hand to basically make the purchases and then hold the inventory until they can go and sell it.
There's a cash flow cycle there that they need to have enough capital to be able to manage that cash flow cycle.
Yep.
So you know.
Things are going okay.
And then eighteen sixty one.
Something big happens in America.
Something very big. The North goes to war with the South. Yeah. Fort Sumter, the civil war.
One, Rockefeller doesn't fight in the Civil War despite being
What would he be twenty one, twenty two years old at that point in time, like prime.
Fighting age he hires a substitute.
There was technically a loophole. He was if you were head of family, you didn't have to
Fight.
Yeah, r Rockefeller's
careful in how he
messages the strife going on in his family. He never throws his dad under the bus. He always holds everyone at least
outwardly in the highest of esteem.
Uh and so the way that he sort of drops a hint here at some point is he says
How could I go fight in the war when the business would die? It was young, it was fledgling.
And so many relied on it.
And that's sort of him alluding to like, look, like my whole family kinda needs this business to stay alive.
Yeah.
So he doesn't go fight.
But
For his business that
He needs to survive.
The war.
Is a pretty big
Boon for commodity prices. Specifically
Food stuff prices.
I mean you gotta supply an army with food somehow.
Yeah, they're a lot more
orders and demand for, you know, pork belly and the like coming in.
Thanks to the war.
So this drives up.
The price of foodstuffs through the roof.
eighteen.
sixty two, the first like full year of the war.
The firm Clark and Rockefeller. They make a trading profit of seventeen thousand dollars.
Which I believe was four times all the money that they had made in all the previous years of operations of the firm.
Wow. They are living.
large, like they're swimming in profits.
They can't buy enough. They gotta put this.
Money somewhere.
So what do they do?
Well
Right around this time.
People in Cleveland are
Starting to hear
About an interesting
Development that's happening not.
Too far away.
In Western
Pennsylvania.
In a tiny
Little Hamlet called.
Tatusville.
Ben's obviously smiling here.
Some of you are maybe smiling. Yeah, I just did a zillion hours of but probably most of you are like
Uh
What are you talking about here? Like Titusville, Pennsylvania? Like I I've no idea where you're going with this.
Everyone knows, David, that the center of the oil world is not
the Middle East or Russia or Alaska or Texas.
But Western Pennsylvania.
Western Pennsylvania.
So
I had.
No freaking clue until
Reading Titan.
Doing the research for this episode.
For like
Decades.
The entire
center of the oil industry in the world was this small
Little town. For like fifty years. Like literally I mean there were some
Producers is some
oil rights elsewhere.
But like very small, like most of the oil in the world.
Came from Titusville.
Pennsylvania.
Yeah, crazy.
Just wild.
And not just Titusville, but Oil Creek and other
areas of Western PA that had oil discovers.
So this is all going on. It's not that far away from Cleveland.
For the first couple years of this going on up until the Civil War
the whole industry is just based there in Titusfield. They drill for the oil, the oil comes out of the ground, they refine the oil, they make
Kerosene.
When we say they were refining, like it was a pretty
Rough process.
I think pretty early they figured out you could use sulfuric acid to refine and separate the kerosene out, but a crap ton of sulfuric acid and like
Doing this in
large wooden boxes with cracks in it everywhere and it's just sloshing around and spilling all over the ground. Like it is a gnarly process.
of quote unquote refining.
Yeah.
Super, super gnarly.
But
right as Rockefeller and Clark have all this money that they need to have something to do with people come up with the idea. Like so the
With the oil they're refining it into kerosene. Cerosene
The main use was to burn in lamps.
And where do you need lamps and artificial light more than anywhere else you need it in cities?
People realize you don't actually have to refine the oil.
In the same place.
The drill.
For the oil.
All of a sudden now people are like
We can buy
The oil that comes out of the ground, crude oil.
From Titusville.
Bring it into our cities, refine it in the cities and then sell the kerosene.
In the city.
That's like a really good business. That's a good place to park some capital.
Totally. And at the same time all these interesting tailwinds are happening where cities are blowing up. I mean you have this sort of like
industrial revolution that's happening where people don't just live in rural areas and farm anymore. There's starting to be a lot more industry in cities. You have for a while only rich people could basically
get oil to burn at night, most people would just the sun would go down and then they'd have no light and they'd go to bed. But like
Way. And they would use whale oil, yeah, for the whaling industry.
Which isn't that where Hathaway of Berkshire Hathaway Hathaway of Berkshire Hathaway came from.
But kerosene's like way cheaper than whale oil, which had a massive shortage and it's obviously
terrible that we kill whales to harvest the whale oil. Like way cheaper, way more plentiful. It's a pretty clean thing to burn relative to the other stuff that people were trying to burn.
This is huge, you know, and the keyword, you say, you know, it's cheaper, of course, easier to drill into the ground than go like harpoon a whale. Yeah, this is an infinite resource here. Yeah, totally.
But the plentiful is the key word.
So
Like you said, it was only rich people that used whaling oil that they could have light at night.
But
the new demand, like with the Civil War going on, the war and then industrialization afterwards.
You need light.
For
commerce for like industry. Like it's not just so that rich people can have light. You need to like operate factories and like do all this stuff.
You need lights, so there's a lot of demand.
And kerosene.
Is.
The answer. So Rockefeller's like, Oh, okay, cool, like this is a new
Commodity.
Uh, they start trading a little bit in this at Clark and Rockefeller.
They start making some profits. But of course, Rockefeller is feeling a little hesitant to do too much of it'cause he's like, Ah, this is speculative. Like who knows when this'll dry up and you know, there've already been some like boom bust cycles in this like
Foodstuffs are kind of our thing, so I don't wanna dabble too much in this speculative weird oil thing. And I think initially they were trading
Crude.
But then like I said, people start to realize, wait a minute, we can refine in the cities.
And
This is like really like early knowledge. This would be like in uh I don't know, twenty eleven if somebody
Came to you and we're like
Hey, there's this thing called Bitcoin. And now don't just buy it, but like
I know how to set up rigs to mine it, you know, and like wanna we just take some old computers you have and like mine it.
So this is like really hard to get knowledge and it just so happens that the one guy
In Cleveland.
Guy named Samuel Andrews.
Who knows how to
Refine oil.
Is Buds.
With Rockefeller's partner.
Clark.
Well that works out. He's like a chemist, right?
He's a chemist, yeah.
chemist. Well but there's like real science involved in like applying the sulfuric acid and you know separating the kerosene from the
gasoline and other crap that's left over that you don't have anything to do with which, by the way.
They just pour that stuff into the river. Oh, totally. In fact, this is a fun little Cleveland trivia. The Cuyahoga River caught fire many times. There's this Great Lakes Brewing Company beer called Burning River Ale.
Oh. And this is where it comes from. Totally, because under the cover of night, these refineries would have all this extra gasoline left over. Cars wouldn't be a thing for thirty, forty more years. They thought the gasoline was like useless. And they would just like drip it into the river. Yeah. Oh.
Awful. God, just wild. Just wild.
So
Andrews the chemist, who knows how to refine kerosene.
He's buds with Clark.
He goes to Clark one day in the office.
the merchant office that they have.
And uh
He asked if he's like, Hey, I think it'd be a pretty good investment.
I know how to do this. Nobody else around here really knows how to do this. I think it'd be a good investment.
Why don't you invest in me and we'll set up a refinery.
And we'll start refining.
Here.
In Cleveland.
So the story goes that uh
Clark is like, look, I'm not too interested in this.
But Rockefeller overhears what's going on and he pipes in and he's like
Hey, actually I think that's
Not a bad idea. I'm interested in that. And Clark, of course, knows that, you know, Rockefeller's really
Good at this stuff. And he's like,
Okay.
Fine. They turn around, they invest four thousand dollars.
On the spot.
To go set up.
A new.
Refinery.
Wow.
So later that year.
They open.
The Excelsior.
Works.
Refinery.
And a strategically
Chosen spot.
In town, Ben, you'll probably know exactly where this is.
In the flats, right?
Uh yeah, I think in the flats it's an area that has
access both to the Cuyahoga River.
And

Of new
rail lines that are going into
Cleveland.
Yeah, and like super industrial area. Actually, in the last few years, there's been like an amazing amount of renovation and like cool stuff that's going on there. So you have this like interesting confluence of
the river and like everything left over from the standard oil days and like the steel boom that happened in Cleveland and now this redevelopment, but
Yeah, it's totally the
city area that's up against the waterfront. We'll have to go do a field trip there. For sure. We'll we'll do a trova trip.
Hay
So
He is like a pig in mud here. I mean, like he was a bookkeep. He's so meticulous. He loves money. He loves profit.
He was focused on trading before, but now he's got this
operation this refinery.
And he becomes like
Literally he's like the Morris Chang of oil refineries.
He's experimenting with
Constantly tweaking the process. You know, Andrew's the chemist is like
Dude, I'm like the technical talent, but Rockefeller's like everything around it. The operations
how crude comes in, where things are located in the factory. He's A B testing, like he's doing all sorts of stuff. He's always looking like any efficiency. And it's all with a view to it. It's not just
Like better is good, but it's all with a view to like
Profitability. Like we want to run this.
As lean as possible, make as much
Money. God told me to make a profit and I am here to make a profit.
By the way, put a pin in that Morris Chang thing, because there's an interesting way that they are very much like TSMC that I want to talk about later.
So
Yeah, he's focused like this is so different. You know, there are other 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. Like, 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.
All of this, the behavior of the other folks, this causes huge durations in price. Like it really is. It's like the early days of Bitcoin. I mean
But still today in crypto. Like things are
Flying around like
All the time. Like prices could be
twelve dollars a barrel, they could be twelve cents a barrel for oil.
And it all depends on, I mean, two things. One is who found what, and two is what do people believe people have found recently. And so like
prices would be impacted by word of mouth traveling and saying, Hey, I heard there's a big gusher going on in this city right now. And people would be like, Well, I guess I'm not gonna buy for a while because I heard there's a big gusher and so prices are going to go down. Yep.
So Rockefeller though.
He's just got this vision where he's like
Oh man.
The more profit I make.
More money and more capital I can put into this.
The more oil I can hold, the more I can produce.
And when the price.
Crashes.
I'll just keep buying. Like I'll just keep he's like he buys the dip, like over and over and over again.
And because his operations are so much
More efficient and so much more profitable.
He can afford to pay like
More than anybody else. He can afford to hold this stuff longer.
He's like really thinking long term in a way that none of his other
Competitors are.
Oh, and we should say like
When we say he's tweaking stuff, he's so much more profitable.
He is both horizontally and vertically integrating.
So
Let's talk about vertically integrating first. He's doing things like realizing
Geez, we're hiring a lot of plumbers to come in and lay this pipe every time we do a build out.
And so they do things like
hire their own plumber and hire their own blacksmiths and decide actually we should do this ourselves and that way we can save all this money on piping instead of buying it from a third party contractor.
Later down the road, he even plants a forest, like buys up a forest.
So that
They can
Cut down the trees themselves to build the barrels out of the
Make their own barrels. Yeah. Oh my gosh. This is the thing. And they save all this money rather than buying barrels from somebody else. And then of course they can innovate on the barrel making process. So he figures out, oh, if we treat the wood in the forest, then it's lighter and cheaper to ship back to the refinery. So we save all this money on transportation. So that's like
the vertical integration side of things, which would be crazy enough.
But he's figuring out that
Wait, we do this process.
How can we sort of use the whole buffalo? Like what can we sell the gasoline for? What I think they invent Vaseline. Yes. They they I think they
by the company that invents Vaseline. But yeah, they like like petroleum jelly, which is one of the
Buy products, they commercialize it.
So
Rockefeller's like
He's like found his calling here. Like this is like
Divine passion here.
There's just one problem, which is
The partner.
Clark.
Clark is like not so into how much capital
Rockefeller is tying up in the business here. He's like
Hey.
We're like merchant traders.
The point is
Profits.
And then we keep the profits.
And Rockefeller's like no, like reinvest in R and D and like CapEx and and Inventory.
So Rockefeller starts going around to all the banks and all the financiers in
Cleveland and lining up
He's not even using just
the profits from their operations. He's getting more external
Financing.
Yeah.
Oh, totally. Like when I say both vertically and horizontally integrating.
In the horizontal sense, he is obsessed with trying to figure out how to be the sole supplier of oil to the world.
Like as soon as he figures out
that there's economies of scale here. He's like
Okay, cool. How do we
Start the flywheel, get as much capital as possible, build out as much production as possible, start having agreements with whoever's got rights to the land as possible.
So we can start vending to the world.
Yep, and own this super
Strategic.
choke point of refining
In cities.
So
Clark is like spooked by all this. Turnow has this amazing quote that he finds from Rockefeller. I don't know where he found this. I should look up in the notes at the end of Titan. This is so good. Rockefeller apparently like wrote or said this at some point.
Clark was an old grandmother.
And was scared to death because we owning to the banks.
Oh so great.
So
Rockefeller engineers a coup.
This is so good.
And some of Clark's brothers are also partners in the business at this point in time.
They get into all these arguments. So
John baits them one day into threatening that
That they should just dissolve the partnership.
And down's like, Okay, great, let's dissolve the partnership. Well,'cause he knows that if he goes to them and says, Look, first of all, I don't think you are risk tolerant enough. Second of all, I don't think you're upstanding.
And so I want out. Like he knows that he loses leverage by doing that. So that's why he baits them into doing their normal thing of getting all up at a fit and saying, We're gonna back out.
Yeah.
Totally. So Rockefeller immediately goes to the local paper.
and places a notice that the partnership is dissolving and that there's gonna be an auction for
the assets of the partnership, including the oil refineries.
And it sets up this showdown where the Clark Brothers and Rockefeller
Yeah.
For
Each other's fifty percent.
stake in
The business.
Which is, by the way, a great way to do it. Like if you've got a partnership that's blowing up.
All right, whoever wants to pay more to buy the other person out is
The person that should get to own the whole thing.
And so the the idea of a bidding war between the two of them to figure out how to value the business makes total sense. Between the two principles.
So Rockefeller though, remember he's been going and getting the relationships with all the banks and financiers. He lines up financing in advance of the auction. So he's got basically unlimited
resources, although it's still the price ends up stressing him out.
Keep eyes, Clark's fifty percent of the oil business for seventy two thousand five hundred dollars.
And in exchange also gives Clark.
Rockefellers gives Clark his fifty percent share of the produce trading. Which by the way, that's something he probably buys him out for like
three to four million dollars, something like that, in twenty twenty one dollars. Yeah. So good chunk of change. Yeah.
But that fifty percent, that seventy two thousand five hundred dollars or
You know, however you want to think about it.
That's fifty percent of standard oil right there.
Wow. Uh Rockefeller would say later.
It was the day that determined my career.
Probably bigger than job day. I felt the bigness of it, but I was as calm as I am talking to you now.
This is like
What we're gonna see. Like this man has
Ice. Not ice water, like literally like solid ice running through.
His veins. It's crazy. So this was a big price. It was more than Rockefeller wanted to pay.
But
This happens in
eighteen sixty five.
in the beginning of in February of eighteen sixty five.
Back to what's going on in America two months later.
General Lee surrenders to Grant.
And the civil war.
Is over.
Um
With the civil war over, what's
Less important.
Commodity produce trading. And what is all of a sudden a hell of a lot more important
Oil.
industry.
Urbanization.
Everything. Well,'cause all these soldiers are coming back and getting jobs and factories, like you have sort of an industrial boom here.
And it's interesting how Rockefeller is sort of obsessed with I'm not a speculator.
You know, I'm not one of these people rushing to prospect, you know, various plots of land in Western Pennsylvania.
It's funny that it's uh
I would say a picks and shovels play.
I guess the point to make here is he's doing the predictable, reliable, stable
very strategic part of the value chain. He's not out prospecting land.
Yeah.
Just doubly underscore strategic.
Did Rockefeller know the war was gonna end in two months? I mean probably. I think
Sherman's probably marching to the sea at this point.
So turn out rates.
Quote.
The war had stimulated growth in the use of kerosene by cutting off the supply of southern turpentine and
Which had yielded a rival illuminant called Campine.
The war had also disrupted the whaling industry, and
And led to a doubling of whale oil prices. Moving into the vacuum, kerosene emerged as an economic staple and was primed for a furious
Post war boom.
This burning fluid extended the day in cities and removed much of the lonely darkness from rural life.
Soon John D. Rockefeller.
would reign as the undisputed king of that world. Uh so
He's now got
The oil operations, the refining business, all to himself.
December of eighteen sixty five, the war is over, all this is going on.
He opens a second
Refiner in Cleveland.
Next to the Excelsior works.
The new name that he really he he chooses, he wants to let everybody know.
Yeah.
his oil, his kerosene, his business, his operations
Is gonna be bigger than anyone else.
It's gonna be the best quality.
And it is gonna
Rain from sea to sea.
What does he call?
The new operation?
Standard oil. Well, at first it's the factory is the standard works and then it becomes Oh really?
Yeah.
The first refinery was the Excelsior works.
And then
The standard works is the name that he chooses, the standard.
Setting it.
The standard.
And importantly, yeah, it's about setting industry standards. I mean, for him, he was observing, I know I'm hammering home on this like speculators and cowboys thing, but like especially after the war, you've got all these soldiers who are trying to figure out what to do with their lives.
And they're going and they're
Working and
drilling. And so you have all these people that have I think in the book it refers to someone with a a gun and a canteen and uh, you know, their plot of land in Pennsylvania. And
I think Rockefeller is basically observing that
The kerosene that
could power the world.
Is
volatile in price.
People are scared that it's not safe because it's being refined in questionable ways and so people's houses are burning down.
There's not professionalization in the
kerosene industry the way that he wants to bring it. So this notion of standard is almost like
Kinda like the T S M C chip yield thing. Like everything that comes off of our line is super high quality.
Totally. That is exactly the same
analogy. Like this is not necessarily easy stuff to do.
They're gonna set the standard.
And by the way, at this point he's now figured out that he can run the factory on gasoline.
Oh, I didn't realize that. So the standard oil factories are burning less coal than their competitors and using the gasoline byproduct. Oh, that's so great. So they're literally feeding themselves. Yep.
Uh.
So you said something a minute ago when you're talking about this. You said selling
This oil.
This kerosene to the world.
So
By the very next year in eighteen sixty six.
You know, America's a big market and is gonna grow hugely, especially after the Civil War.
But do you know what's a bigger market?
the rest of the world. Especially at this point in time. I mean, America is not America yet. It's probably thirty, forty million people.
Yeah.
Maybe if that.
All right, you keep talking, I'm gonna Google this. Okay, okay, great.
So by the very next year.
In eighteen sixty six.
The fledgling.
Standard.
Oil company.
is already selling two thirds of their kerosene
Overseas.
Primarily
To Europe. It's like one third domestic, two thirds international already.
thirty one million people in eighteen sixty five.
Well.
So they're selling most of their oil overseas.
Rockefeller dispatches his little brother William, who's now working in the business.

To go handle.
Olive.
Export.
Business.
For standard oil. Do you know the story about when he
Needed to raise
I think it was five.
Fifty thousand dollars?
Ooh, I don't know.
Oh yeah. Well it's a great story. So this is in Chernow's book.
Rockefeller has a
Bit of his father in him, uh sort of a flair for showmanship.
And he really needs fifteen thousand dollars. Like he needs a loan pretty quickly.
Any sort of looking around for financiers for it.
And
He dresses very nicely and he presents himself nicely and he walks in areas where he's sure to bump into people, and at some point someone stops his carriage and
And looks over and says.
Oh, Mr. Rockefeller.
Could you use a fifty thousand dollar loan? And of course Rockefeller's like
Jackpot And he sort of looks at him like without breaking and he looks at him he goes hmm
Could you give me twenty four hours to think it over? Yeah.
And of course, by doing that, he gets like the best terms on the loan. It's like I'm not sure I really need this.
He's unbelievable at like getting
his hands on way more capital at way better terms than other people would be able to.
Oh, so good.
Now that William's in New York and the family's got
The family. Uh has got
operations in New York, they can get like
Oh, Mr Sir Rockefeller's
Could you use
Two hundred and fifty thousand dollars or five hundred thousand dollars. So
Pretty soon they're like bringing a bazooka to a like a fist fight with the other refiners out there.
And it's kinda like
This whole
part of the story just reminded me so much of like the Uber.
Days, you know, remember when Uber went out and raised all that money and like Oh, we're gonna flatten
Left and
D and all the global competitors that like
Oh.
It was totally the Uber playbook, except
It really worked. Yep.
Speaking of Uber, right after William goes to New York
The sort of um
Shall we say Emile Michael character of uh uh of standard oil. Stretching a metaphor here. I'm stretch all right, I'm stretching it too far. But an interesting, uh colorful character.
comes into the fold.
And the
Fledgling standard oil empire.
I uh
I've been posting on Twitter like all the fun stuff, like just'cause I've been enjoying
This research so much.
And I posted about this guy.
Henry Morrison Flagler.
On Twitter.
And uh
Andy Sparks replied to my tweet with I think like the best one liner about Flagler.
Possible.
Flagler was savage.
Oh and he was really like you know, Rockefeller
He's driven by this divine
Calling.
He's willing to go to the mat. He's willing to do just about whatever
But
It was Flagler and then some of the other
Lieutenants that he brought in.
That were like
They're the ones who did the dirty work. Oh, yeah,'cause Rockefeller
You know, he needed to preserve
plausible deniability left, right, and center. Especially once they figured out
all the business tactics that w were really gonna let them press their advantage.
You know, he had some very bad lieutenants so he could stay as uh plausibly good as possible.
Rockefeller was for sure the one pulling the strings.
So
Flagler ends up coming into the business because he has a wealthy relative named Stephen Harkness.
Whew.
hears about what's going on and and wants to invest like equity dollars into this.
New standard operation.
So he invests a hundred thousand dollars in
operation which Oh my goodness. Like I didn't actually find like
What the net worth of the Harkness family ends up being because of this, but like
Enormous. Yeah, it has to be just generational wealth.
And his sort of one term that he asked for as part of investing is that he wants I think maybe Flagler was his nephew or something. He wants
Flagler to join the firm as treasurer to quote keep an eye
on his investment. And so Flightly joins and literally
This is what I tweeted.
He keeps a quote on his desk at Standard Oil.
For all the time he's working there.
says, do unto others as they would do unto you and do it first.
Oh my goodness.
So Flagler.
Takes over the negotiations.
For
Shipping.
Of oil with
The railroads.
If you know anything about standard oil, you can see where this is going.
When Rockefeller was running negotiations with the railroads.
He always was able to get pretty good rates.
Shipping rates.
Because he had a bat now.
Being
there in Cleveland on Lake Erie. Totally. During the summer months in the spring and fall.
We can ship way cheaper.
By sending it out by water.
My water. Yep.
So all the crude coming in from Titusville to be refined in
Cleveland at standard.
could come in over the water or by rail and then
when it was going out to then go off to the rest of the country and the rest of the world.
He had.
Another option.
Flagler.
He's like, Oh, this is nice. That's cute. Let's exercise our power a different way. Yeah. What about if we go to the railroads?
And we're like, hey guys.
It's really expensive to operate these railroads.
What would you say if we were to guarantee
A really, really, really large amount of minimum
shipments of oil that we'll do with you.
In exchange for us guaranteeing you guys like an unbelievable amount of volume.
That we'll do on your railroads.
You give us an equally unbelievable
Shipping rate like cost of doing this.
The railroads are like, uh yeah.
That sounds good.
Except the railroads are like, Wait a minute.
But you don't make that much oil.
Where's all this oil gonna come from? Well, uh specifically the railroads think this sounds really good.
Because with the amount of volume that they're talking about, this means they can run dedicated lines.
of just oil tank cars, so not mixed
Trains with like boxcars and oil cars, like just oil tanks.
Between Titusville
And
Cleveland with no stops.
So if you think about operating a railroad
If you have different types of product that you're loading on to the train, that takes more time and money. They were like being forced to stop to pick up like one car and add it to the train. Exactly. And then all these stops, that just adds up. You know, it costs money to you know, time is money here.
So they did.
They're but as you said, Ben. They're like well how
Uh Henry, like this is
Great idea, but how are you gonna do it? You don't have enough capacity. And two other things before we answer that question. One is
Just to give like the magnitude of how much this helped them. It lets them
own way less cars also like the railroad
They get to go from something like
needing to have a hundred and fifty cars to be able to like make the same amount of money on like forty.
Or something just like dramatically smaller.
And the other thing is standard oil has started to like really build up some credibility here because
When people were putting
oil on trains before
they were sloshing around in like open wooden boxes.
And like standard oil pioneered
Hey, we're gonna put'em in like
tanks and then eventually metal tanks and uh it really like professionalized the And eventually we're gonna make railroad cars that are like the car itself is just a tank. Yep.
And fast forwarding a little bit, like oh railroads.
What if we made those tanks for you? But we're getting ahead of ourselves. So

Don't worry guys, I got this.
So he goes around to all the other refineries like everybody else in Cleveland.
He's like, Hey guys.
I have negotiated a great
Great.
For all of us.
Do y'all wanna come on board?
Together.
And we'll all like pool our
Uh shipments that we're all getting in for Playtusville.
And uh by doing this all together, we've got this great rate. This is an offer that they can't refuse. And not not only can they sort of not refuse it because
Uh uh what happens if we say no.
But this is their major cost driver.
They're in a commodity industry at this point, and so distribution of the oil is actually the big driver of the business.
Yep.
So okay, everybody's like, Well, this is fantastic. Fikers like, Okay, great, great, let's do this.
But uh you know one thing
Let's not write any of this down. Okay. Let's just keep this all as a little gentleman's agreement.
Between all of us.
And the railroads.
Nobody knew we don't need any feds, you know, sniffing around here. Feds, quote unquote, if they're even worthy, then well basically if anybody ever asks us if we have an agreement
There's no agreement.
Everybody can look at each other and go, I haven't seen an agreement.
Yep.
Totally. So this
Agreement. Comes to be known as the Lakeshore Agreement.
Because that was the Lakeshore Railroad was the main railroad that they did this with.
And this is huge.
So
By doing
This
Until this point in time.
Cleveland as a city. So if you forget the individual companies of which Standard is one within Cleveland, but just think about refining production of oil.
In America.
Cleveland was actually the number two.
largest center for oil refining.
behind Pittsburgh.
At this time.
Once they do this deal, Cleveland is like fast tracked and becomes
Number one.
And
Standard and Rockefeller and Flagland. They're like the godfather. They they're like they just brought all the other families in Cleveland like to heal. Like they run
The collective now. And this starts a playbook of like
If there's oil leaving the city
Either it's ours.
Or we have some agreement in place where like it's good for us, even if it's not actually ours, and maybe it'll eventually become ours.
Yep.
So they dominate Cleveland. Cleveland becomes the number one.
Oil.
refining center in America.
But you know that's not enough for
Young Rockefeller.
He's got his sights set on.
The whole industry, like
Pittsburgh, Philadelphia
There is some refining happening in Titusville, some in West Virginia, some in New York. He wants all of it.
So how's he gonna do this?
As you alluded to at the top of the show.
There actually is no legal framework at this point in time for businesses to operate outside their own
States.
Importantly.
They cannot own property.
In other states.
Yeah, they can't own properties, they can't have operations.
Literally this you know, the United States was like
This is all changing after the Civil War, but it was united.
States. Like the states were the sovereign
You know, or near sovereign entities here.
Totally. And it's really only recently.
that you could just sort of incorporate your own business as you please at all without getting express written consent from the government. I mean in the
Days of England and early in the US, like
Incorporating a
company, a corporation was like, the government's granting you a special right to operate this business. And so
Already the doors are blown wide open that you can just start a company, but we're not yet to the era of like, oh, I can start a national corporation. Yep.
So
They think for a while.
This whole little
crew at Standard Oil in in Cleveland about how they're gonna do this. They know that
If they wanna
consolidate the whole industry and the whole country.
They need A a lot of capital.
And B, uh an ability to operate outside the borders of Ohio.
So Flagler.
Comes up with this idea.
It's financial and corporate law innovation. Innovation. And d did you read about how
He comes up with a new structure that they use or or uh I guess it was an old structure, but that they
Wasn't very popular, but they
Turn two. The joint stock company. Did you read about how Flagler who was not a lawyer
Drew up the actual like
Incorporation. Oh, wasn't it on like a yellow legal pad? Yeah, like on like the equivalent of a yellow legal pad. No letterhead. Yeah, totally. Which partially I think was
Just'cause that's how
Like this was still, you know, Wild West type stuff.
But also I think they didn't want anybody to really know about this. They wanted this to be super secret.
So
Flagler comes up with the idea is like ah these joint stock companies, which I mean I think like wasn't the Dutch India Company a joint stock company?
She takes this idea.
But not many other companies were doing it.
He says if we were a joint stock company
Then we could buy shares in
Other joint stock companies.
We could also sell shares.
Yeah.
ourselves.
You know, to raise money or
to strategic partners who we might want to have a vested interest in
Our success? This is interesting. This might solve some of the
Capital.
Requirements.
Okay. Well that's
Interesting.
And also this like selling shares to raise equity capital thing, Rockefeller is like, My God, that is brilliant. How did I not think of this before? Totally. It's Flagler that comes up with this. It's amazing.
So
On january tenth, eighteen seventy,
They abolish the old partnership.
And they pour all of its
Assets into
The new joint stock company, the Standard Oil Company of Ohio.
Boom.
It's born.
They capitalized this new joint stock corporation with one million dollars of liquid assets. Like that is how
Enormous.
This had become already.
Unheard of I don't think that there was
Any other organized enterprise.
in America with that amount of capital.
Period.
Any other industry, like already, that's how big this is and we're still just getting started.
So this doesn't solve the interstate.
Commerce issue.
Though so
They come up with another.
absolutely brilliant and diabolical plan.
To solve this.
Which is
Trust.
And
What they decide to do is they say well like
Okay, technically.
Companies can't own shares in other companies outside the state.
But what if we create a
Trust.
Then this trust holds shares.
In companies all around the country.
The trust could have some trustees that sort of get to
decide what happens with
maybe all the companies that roll up to the trust.
we can sort of uh make sure that these corporations, each of which are n nicely situated inside their own state and don't own any property outside their own state,
But like
We the trustees
sort of get to decide how those companies might work together.
Yep, and there's no law that says that
Officers of you know
Any given company can't be trustees of a trust that owns shares in other companies.
So this is the loop all around it. So they create this trust.
And
The trustees just
A
Dictate to the other.
companies that they purchase what to do.
But also
B this is important.
All the dividends from all the other companies, the trustees
designate the beneficiaries as the individual shareholders.
of standard oil of Ohio. So nothing ever touches
The actual company, Standard Oil of Ohio.
It all goes
To the trustees and then to the individual.
Shareholders. And that's how they get around this.
Interesting.
So the individuals who own
the corporation
Yep. Literally everybody on the cap table. End up being the sort of
puppeteer, controller, and beneficiaries of
All these other.
Entities.
So
Rockefeller.
He's like oh this is amazing.
He comes up with the idea that
None of them.
Are gonna take a salary.
They're gonna focus solely on
These dividends.
That are coming in as like a a source of a of
Value at income.
But also even more importantly focus on the appreciation of the value of
You know, this whole enterprise.
This was new thinking, like
No.
people listening probably like uh yeah, duh, like uh equity. Like why else would you join a startup.
Nobody had ever

Equity.
And dividend could like that that could be your primary
Source of
income and and wealth generation and that you could use that to incentivize
New people who you're bringing into the organization as employees or partners or companies you're buying.
Yeah, the idea that like your competitors could become your friends by being able to offer them ownership in the joint combined company where
As we win in this industry and this w industry gets bigger, we all win by holding shares of this thing together.
Yep.
Turn out rights.
Whatever the debates about his ethics.
Economists and historians have unanimously extolled Rockefeller's role.
As a pioneer of the modern corporation.
And then
Quoting from
Another biographer of Rockefeller.
Rockefeller must be accepted as the greatest
business administrator America has ever produced. And it's this. So
This is how well this works. In the very
First year.
Of the trust.
eighteen.
Seventy, first year of all this getting set up.
Remember there's one million dollars.
In total capital.
that gets put into this structure.
They pay.
A one hundred and five percent dividend.
At the end of the year.
Including
Also reinvesting tons of cash flow back into the business and
expanding and buying other companies. So like
The million dollars that was in there, they pay over a million dollars out to the shareholders.
And have many other millions of dollars to go do other things.
It's crazy. They're extremely profitable and they're growing like crazy.
Yeah.
And let's talk about this uh Rockefeller's argument to the societal benefit for a moment, which is like
A, it's silly that the state borders are preventing us like why should that really be a thing? Like to the extent that I've been able to rapidly expand in Cleveland.
And we've been able to create great product for consumers at a low price, quality of life for people has gotten better.
And like that has all happened because we've expanded here.
Why shouldn't we just be able to do that for people everywhere?
And his argument is really like
This is for
the betterment of
Consumers. Now my
competitors who when I move into these states probably don't like it, but like
Ultimately.
the American public wins.
And
He's right. He's totally right.
Just like Jeff Bezos would probably say the same thing today.
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So
David.
they've now got the structure in place to become a national trust.
And expand here. How do they do that? What happens?
Oh, this is so great from just like this story. The smile on my face is so wide right now. Whether it's juicy. Yeah. Wait, great great is up for debate.
So
You know, the structure of the joint stock company.
They can buy
And hold stock another.
Companies that can issue shares hold it in them.
What are they gonna do here?
Remember we said the railroads are the most strategic.
Important.
Supplier and show point for
The industry. Standard
Goes.
Two
The three biggest railroads.
Pennsylvania Railroad. The storied
Huge, enormous Pennsylvania.
I think that's on a monopoly board.
It is. It is literally on a monopoly board. Like that is how
Uh the Pennsylvania, the New York Central, and the Erie Railroads.
And they say uh
So we got this new thing.
This new thing lets us do things.
with other companies.
Do you want to cooperate?
As a part of our new thing. How about we all do something together?
And the railroad's like, Oh yeah, we like doing stuff. This it sounds pretty good.
So they get together, they set up a shell corporation.
Called the South Improvement.
Company.
Oh, this is so juicy.
Which is intentionally nebulously named. Yes. And in fact later.
in life when uh
Rockefeller would be getting grilled in federal depositions.
He would be asked if he was
ever a director or involved in the southern improvement company. Which of course is not a thing. Nope. Standard Oil was never involved in the Southern Improvement Company. Oh my goodness. So great, obviously.
He was not perjuring himself by saying that because
The questioner got the name wrong. Though I think he did perjure himself in other
S I C related. Yeah, I think he did.
So
Here's the deal.
Standard Oil is gonna set up and control most of the South Improvement Company through their new trust and joint stock corporation structure.
The railroads will own a a token amount.
But
The railroads.
And the principal, you know, owners of the railroads, the individuals.
They're gonna issue some uh standard oil's gonna issue them some stock.
So that uh
You know, these guys now have a have a little uh little skin in the game with standard oil.
All the interests are aligned here. Well, and the railroads had a problem that they need solved.
Which was that
because of the boom bus nature of everything that's going on their cars, especially oil.
And the sort of
Remember that thing that I mentioned earlier where people are
deciding not to buy because they hear it's gonna be cheaper soon, because they know there's a big gusher. Like this whole thing is like totally screwing with the railroads.
Not to mention the fact that
That
with intense competition among the railroads
just like there was intense competition among all of the non sort of standard oil
oil companies, a lot of the profits are just being arbitraged away. And so they've got unpredictable demand. They've got
booms and busts. They've got this situation, especially with oil, where like
certain types of oil in certain areas were so insanely cheap that like everybody's going out of business because no one can make any money. The same sort of thing is happening in the railroad industry. And so
If
there's like a cooperation opportunity for the railroads and
you know, Rockefeller's offering them, I can kind of solve your problem here and we can sort of smooth out business. Then it really comes down to like it's really hard to run a business when
Prices are are fluctuating and they're not fixed. So clearly the answer is to fix the prices.
Oh my goodness. 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 and certainly in part two of like
what parts of this were good and what parts of this were bad.
It's both.
There's lots of both that happened all through this story.
Yep.
The three biggest railroads.
And standard. They get together in this south improvement company.
They say, here's what we're gonna do.
All the railroads we're gonna set a new
Fixed price. There's now a fixed, literally a fixed price.
For shipping oil on railroads.
To everybody out there, all anybody who's shipping oil, there's one single
Fixed price and it's really high. Whatever it was before, like it's a multiple of that. It's
Really high.
Except
For anybody who's a member with us of the South Improvement Company,
Y'all get a fifty discount on that fixed price.
And it goes even further. This is just like oh just twisting the knife here.
Anybody who's a member of our little uh our little company here? One might say uh a little cartel.
Little cartel. Yeah. Also they will receive
A a little dividend, a little kickback. They call it technically a drawback.
from any revenue that any other oil producers
That are not part of this th that ship on the railroads.
Part of that revenue from the really high price that they're charging. They're just gonna give some of that revenue to the competitors that are part of this little cabal here.
This is the most mind blowing part of the deal. Not only
Do
you get a rebate.
for shipping with us. So that way the price is actually way cheaper.
But
You also get a rebate even when you're not the shipper. I mean they call it this straw back, but like
Other people ship stuff with us and thank you because you are a nice member of our organization, you're gonna get some of that money.
And so your competitors are just paying you.
It's the craest system ever.
I don't know what the formal definition of the crime of racketeering is, but this sounds like whatever it is, I think this fits the case. Well there's a couple different ways that this story draws parallels to Microsoft, but this reminds me so much of that CPU licensing thing that they did. Do you remember this in the early Windows days?
The deal that Microsoft cut with
I think it was IBM.
was yeah, you guys can use Windows and that's great.
And any computers that have a CPU in'em that that aren't running Windows.
You're also gonna pay us for those CPUs.
And that's the deal they signed. And so Microsoft basically
ended up with, you know, the monopoly of the entire industry because
IBM's like, Well wait a minute.
whether we're putting Windows on these machines we're not, we're paying for it. And so I think Windows it is.
And actually I don't know if it was Windows yet. It might have been DOS.
Gates and uh
Bomber and Jeff Rakes and and all the like if they'd had our episodes here on Standard O to listen to before they put that stuff in writing. Uh history could have been different. It turns out, yes, this may have been a flash point once
The public.
realized how egregious this sort of agreement sounded. I'll say.
There is literal rioting in the streets in Titusville in in reaction to this, once word gets out. Like literally, like
People are like fighting in the streets, they're like
Banging up and destroying, you know, standard uh tanks and property and like I mean it's truly heads I win, tails you lose for standard oil versus their competitors.
Yep.
This is the point.
where public opinion really starts to get concerned about standard oil.
In particular informed by the competitors because the public public is like great, like we're getting so much stuff so reliably for so cheap, this is awesome.
Yep.
So the railroads maybe they they know they've maybe gone a little bit too far.
And they're like, uh
Guys, I don't know that we can actually
Do this. And uh Rockefeller and Flagglate. They're like
Uh it's okay. Let's just like hold out for a couple weeks.
I think we're gonna be fine. We're gonna go do some stuff and we'll get back to you. So during these few weeks
When
This deal has not yet gone into effect yet.
But rumors of it are spreading throughout the industry.
Flagler and Rockefeller go around.
To all the other refiners.
Yeah.
Cleveland.
A the fluctuations, but B, oil prices are getting driven down so far that like
People are trying to produce
and make profit on this, but like
because of this crazy inflation then deflation thing that happens, like a lot of these companies are slowly on their way to going out of business anyway. Yep. And they're already
Kinda.
brought to heel by standard by the Lakeshore deal, where they're already sharing capacity.
So now.
Flagler and Rockefeller go to them and say like
You know
That great rate that we organized for you, yeah.
It's over.
Y'all heard about this uh South Improvement Company thing.
It's happening.
So the way we see it, you basically have two choices.
You can stay nominally independent.
And you can die.
Or
You can just sell your operations to us. Come in and join the fold. Get some standard oil shares. We'll even give you stock. And then
We can
Mm.
Profit from this amazing
Deal.
That we have.
And there's something Larry says, like Rockefeller says, own
shares of standard oil and your family will
Never go hungry.
Yeah.
So
As Ida Tar Bell, who we're gonna talk much about next time, wrote in uh
her investigative reporting.
on standard oil.
This is what she claimed that the standard pitch was to other folks about joining the scheme.
Quote, You see, this scheme is bound to work. It means an absolute control by us of the oil business.
There is no chance for anyone outside.
But we are gonna give everybody a chance to come in.
You are to turn over your refinery to my appraisers.
And I will give you standard oil company stock or cash as you prefer.
For the value that we
Put on your business.
I advise you to take the stock. It will be for your own good.

Uh so they're literally just saying like they're deciding what value they're gonna pay for.
All these refiners.
the offer that they put in is like twenty five to fifty percent of
book value. Yeah, what the refiners even paid to build the factories in the first place. And and Rockefeller's argument is like, well, we're just gonna shut most of these down anyway. I mean we're actually doing them a favor by taking this thing that's just gonna go out of business over the next few years, giving them some shares in our company as like a you know, we don't want to be
too terrible to these guys. There are our fellow countrymen and they're also in our industry and
We're just bringing'em in, we're giving them some shares, and I you know, I'm gonna write the whole thing off anyway. So it's a crap factory.
So over a period of six weeks.
From February eighteen seventy two to April.
eighteen seventy two.
Standard Oil buys twenty-two of the twenty-six other refineries that are operating in Cleveland. And this comes to be known
as the Cleveland massacre. Uh and then once they already own all the refineries in Cleveland, they're like
All right, we're done. You know, we don't really n even uh need this uh South Improvement Company thing anyway, and I guess the public doesn't like it, so um
We're not gonna do it.
And apparently not a single barrel was ever
Shipped.
using the South Improvement Company
They never document anything but structure.
It was all set up and agreed upon.
But then they didn't actually ever need to do it because they used it as leverage to just go and roll everyone up anyway.
And this was the tipping point. So obviously this was you know the Cleveland refiners first, but then immediately after
They go to Pittsburgh. They go to Philadelphia.
They go to West Virginia. They don't even have to set up some ploy shell corporation like the South Improvement Company. They just go to all the other refiners in these cities and they're like,
Y'all heard about what happened in Cleveland?
We're coming here next, so You want some shares?
You want some shares? Yep.
Bye.
eighteen seventy seven.
Standard oil.
Controls.
Ninety
Percent.
Of the oil business.
In America. Nine zero.
Percent.
As barons put it.
Consumers of kerosene had no choice but to purchase the product from a standard company.
Not that they complained.
Standard's policy was to upgrade the product continuously while lowering the costs in order to frighten away potential competitors and increase sales.
I just wanna say, David, like
Just like T SMC.
It's like yep.
I think it's something like seventy percent of the leading edge CPUs flow through the island of Taiwan and you know, fifty percent are actually T SMC manufactured by TSM C and like
We're all better for it.
As consumers.
And I I think it's just fascinating this notion of like
We're gonna keep lowering prices, the product's gonna keep getting better, and at the end of the day, it actually is good for consumers.
Oh, and we're gonna get huge and super profitable on the way. Yeah. Well and you know
S M L and uh
You know, all the equipment manufacturers, they're kinda like the railroads here. Right.
Although
Amazingly this
cooperation with the railroads really didn't lead to standard oil squashing the railroads. Like they stayed really good businesses for a long time. Well, they did for other industries.
Or at least I think they did. I don't know enough to say about the railroads. They certainly stayed independent.
But
You know, Rockefeller and Flagler and this whole crew, like
These guys are paranoid as well, right? Like they do realize after they've just gone and consolidated the whole oil industry, they know that the railroads
do have strategic
Leverage over them.
And I can't remember like the oil refined. They let the other refiners stay in business. They just
You know, bought him and gave'em standard oil shares.
They're worried about the railroads.
We don't want them having strategic leverage over
Us.
How can we co opt?
Damn.
So I mentioned earlier.
Tank cars. Yeah, what was the deal here?
So right around this time, standard starts going to all the big railroads and they're like
You know, we've saved you all this money on OpEx.
Now you get to run trains directly.
You know, no stops, no box cars.
This is great for you.
But these
Tank cars, these modern tank cars, you know, made of steel and the like. That's a lot of cap acts.
For you to
Keep building and and we just keep sucking up all this.
Shipping volume with y'all.
What if we just make these cars for you and we lease them back to you. We'll take on the CapEx.
To make the cars. And we'll lease them to you at a really low rate.
So what's the play here?
So sure now.
Writes about this.
He says as the owner of almost all the Erie and New York Central
Tank cars.
Standard Oil's position grew unassailable.
At a moment's notice, it could crush either railroad.
By threatening to withdraw.
It's tank cars.
No tank cars, no business. You can keep running this great business for y'all.
But
You know, you mess with us.
We can withdraw our tank cars. Wow. And so now they've got
Ninety percent.
Market share.
of kerosene.
And they've got
this relationship with the railroad where they basically are going to get the most favorable rates without a railroad going out of business.
And then they take it one step further.
Again. So By the way, David, you laughing through this like maniacal plan, you're like the nicest
It's so scary'cause I'm like
Oh, I just have implicit trust in you. Like you're so kind and you're so warm and you're so and like you're like and then they take it one step further. And then they stab the knife in the back again. And it's so great. Oh
This is such a like good story.
I love it.
Not condoning this behavior by any stretch of the imagination.
An important pillar of American history.
a critical part of American history. So
Okay.
Do they take it?
One more step further, and this is really the coup de gras here.
So
As they're doing all these deals and said, you know, and and standard oil is becoming this octopus, as it would be known.
Der critics.
Octopus, you know.
Like you think the Goldman Sachs vampire squid sucking on America was bad. Like l literally the standard oil octopus is bigger than
Ten vampire squids.
So
There's a new
Technology that people are thinking about.
with regard to oil. Not gasoline. Not yet.
That's coming later.
But
all of the you know, the oil's being moved around either by water
Or on railroads.
People are thinking that like
There might be a way to move oil.
Much, much, much more efficiently.
So the concept of pipelines
already existed, but really short distance pipelines.
Literally from the Derricks, from the Wells.
to the railroad depot. So this would be like, you know, a mile at most.
They would pump oil through pipes.
to the railroad depots or to the, you know, shipping depots or whatever to then load it up in cars and get it out of there.
Some people start thinking like, Well I wonder if we could
Pump.
Well
A lot farther than just a mile.
Or two.
And
Meanwhile, the remnants of the industry that haven't yet been consolidated by
Standard.
They're looking for any kind of
you know, Hail Mary Pass to
get some leverage back in the industry. So they decide that they're all gonna go in together.
Against standard and the railroads. They know they can't get any concessions out of the railroads.
They're gonna try and develop.
A pipeline, a long distance pipeline.
So in eighteen seventy seven.
They do this.
They band together and they form the Tidewater Pipeline Company. This just sounds like a scandal right off the bat, like the name.
Tidewater pipeline company.
Why would you name it that?
I mean it's eighteen seventy seven. I have no idea. And
First the goal is that they're gonna
Pi oil from Titusville.
Directly to Baltimore.
On the sea front.
They then shorten it to Williamsport, Pennsylvania, which is still a hundred and ten miles. This would be like an amazing proof of concept that this would work.
Isn't that where like the Little League World Series is? It is, it is. Yeah, I thought that's Yeah. I don't know why Williamsport was where they wanted to
Pipe this stuff too. But
They do end up piping it. So standard though.
Fights them tooth and nail on this.
a bunch of the execs want to go hire thugs to go like smash the pipeline and do all this stuff.
Rockefeller's like he reins in his exuberant execs on this and says, No, no, we're gonna fight it with every like, you know, uh
political leverage that we have, which
They do.
But
They don't succeed.
In eighteen seventy nine, the pipeline turns on and it works.
And I think a bunch of people in standard are like
Probably like
pissed at John. I like don't understand why
He let this happen and you know, how could this terrible
Rockefeller's like, Oh, don't worry.
I have a plan.
Now remember this is just one
Route.
that this new pipeline has opened up, you know, from Titusville to Williamsport.
Rockefeller's like, I got all the railroads in my pocket.
They go around to the railroads and they tell the railroads, they instruct the railroads.
To cut shipping rates.
So far down
On this line.
that literally like they're basically paying anybody who's willing to ship by railroad
On this line.
So it's actually
The pipeline, even though they invested all this money in building it, and it's so much more efficient, so much cheaper than running a a rail car.
Because
At standard oil's pressure, the railroads have now lowered s prices so far in response, it's not economic to use the pipeline.
So they starve'em out.
This is like the Bezos versus diapers.com thing where Bezos is like, Oh, I can sell diapers at a loss forever. Like you don't understand.
That is totally what happens. So the tide water
Pipeline company.
Is like
Up against the wall, they're about to go bankrupt. They can't.
Compete.
And by March of eighteen eighty.
They sell a minority steak.
In the pipeline to standard oil.
Standard assumes control of the pipeline.
Takes all the technology.
immediately turns around.
And goes and builds out four more major pipelines
From Titusville to Cleveland to Manhattan to Philadelphia to Buffalo.
So they build these, you know, now pipelines that are huge. Do you know what land
They build.
The pipelines on.
This is the most cold blooded thing in the whole freaking episode.
No.
Okay, so who would have
Land rights.
In straight lines between cities.

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.
We're friends. We help you, you help us. How about we use your land?
How about we build our pipelines right along next to your railroads. And then it'll just be a little reminder sitting to you right there.
Reminder to y'all.
That we don't need you. That we've built.
On your land.
You're looking at your competition every single time you glance out of a train car.
So if you ever, you know, want to try and screw us on prices Just remember we've got an alternative.
Right there. Wow. Oh my God. So By the way, do you know the deal with Sprint?
Random uh business trivia effect.
I may have said this on another acquired episode. I think we've talked about this before, yeah, that telephone lines were laid along
Rail lines? Yeah, it's the Southern Pacific Railroad, SPR. Oh yeah, that's right.
That's right.
And exactly for this reason, like, hey, we need someone who's already eminent domained a bunch of land that we can go directly in a straight line from one city to another.
Boom. Yeah.
Crazy.
I don't know for sure, but
I didn't see anywhere that the railroad's got any like equity stake in these pipelines. Oh wow.
Alright, so I fulke back
my comment earlier that it seems like the railroads made it out okay. Well I think they actually did. I mean this was kind of Rockefeller's style and standard oil style. It's like we're gonna let you live we're gonna be benevolent dictators. We're gonna let you continue. You're just gonna remember that, you know
Our knife is
Pressed against your back at all at all times.
Okay, so after this.
It's done. I mean, this is the story of how standard oil
became.
Standard oil. Like
Rockefeller standard, like they have one on a scale that
Nobody has ever won before since
Their competitors are obliterated.
new upstart technologies are co opted.
All of the suppliers, you know, are reduced to total lackeys.
We didn't talk about the customers. Uh, this is great. So
Most kerosene was sold at retail in America in grocery stores.
So right or in the sort of
early eighteen eighties.
standard decides to run the same playbook that they've run with the railroads.
with the grocery stores in America.
They go to them and they say, Hey
Uh, you know, it's expensive for you to um
Set up and give shelf space and everything to all of these
cans that are all, you know, non standardized of standard oil kerosene.
In your stores.
From now on, all standard kerosene needs to be sold in.
Standard.
canisters that we set the terms on and we fix the price.
And we tell you where you're gonna put it in your
Stores. So some stores
You just sort of bristle at this and say they're not gonna do it.
Standard sends out a letter. Uh th in Mississippi they had a particular problem with this.
They send out a letter to all the grocers in Mississippi. They say if you do not buy our oil
We will start a grocery store chain.
to compete with you and sell goods at cost and put you all out of business. This is in writing sent to all of them.
You can just feel
the American public and Washington getting stirred up about like, okay
Monopolies are pretty bad.
We really need some legislation about this.
Yeah, as Chernobyl writes, by this point in time, Rockefeller's creation could only be discussed in superlatives. It was the biggest and richest
the most feared and most admired business organization in
The world.
Wow.
Well.
In eighteen eighty three.
Official
Standard Oil headquarters moves to
Manhattan to New York City and Rockefeller.
Himself.
Twenty six Broadway.
To Manhattan to twenty six Broadway. Uh, do you know which is the building that they have constructed for the standard oil headquarters, twenty six Broadway, right on Wall Street.
You know what is right outside of twenty six Broadway today.
No.
The ball.
The charging bowl.
Uh.
You know the bull was only put there in like nineteen eighty nine, I think.
Oh no, I would have assumed it was there through the eighties. It was put there after the nineteen eighty seven uh stock market crash. Ah, interesting.
So Rockefeller and uh
You know, his brother and all of his their lieutenants, you know, they moved to New York.
Also.
around this time. They just like buy up Midtown.
So uh
Rockefeller moves to right off Fifth Avenue in the fifties.
Was it fifty fourth Street?
Maybe I actually don't have it written down.
It was either like fifty third or fifty fourth street right off Fifth Avenue.
He buys a house, moves in there.
Really right there, you know, between the park and and between Rockefeller Center, you know, like No, there is no Rockefeller Center. They build freaking Rockefeller Center. Which he had nothing to do with. That was uh being endowed by his son, but yeah.
We'll probably talk about this more next time. I didn't realize
It was Columbia University's campus.
There's a lot of things.
get in and start building, developing and building Rockefeller Center, they lease it from Columbia and then they ultimately buy it.
Fascinating.
Yeah.
Well
Part two, I mean we'll have a lot to say about
universities and Rockefellers in New York and
And we haven't touched a lot on the personal side of Rockefeller other than saying he was deeply religious and
believed he should make a lot of money and then do interesting things with it. There's a lot of like very good things he does with it that I think we'll save for part two.
And a lot of his idiosyncratic things around like
Being afraid of death and wanting to live a long time and his health obsessions and
I think a lot of that especially starts to show up at his old age, but
David, bring us home here to eighteen ninety. Yeah, so
I mean this is like it's funny we're gonna
You know, recount.
Now what will ultimately
become the beginning of the downfall of standard oil. But like I don't know, like
It's weird being at this moment in the story.
Because they've literally won. Like I don't think we've ever had this before. The only thing that can bring them down is
Government.
Or a paradigm shift.
I'm referring to like
electricity and lights in houses, but they very quickly were saved by the fact that
conveniently right around the same time, any thirst that we had for oil before
Once you have the car.
Rockefeller got so much richer in his retirement
from his shares of standard oil, which became
you know, the things that powered us moving around the country in cars than he ever got from kerosene.
So it was like
a paradigm shift could have disrupted and did disrupt the core kerosene business, but like
the thing that happened at the same time was so much bigger.
than anything they ever could have imagined.
I
Think that standard
was also making some investments into
Electricity and electrical utilities.
I don't know how deep they got into the business.
But all I'm saying is monopolies
Even if you don't trust bust them.
are always at risk of being disrupted by a paradigm shift.
Totally fair point.
Not in this case, though. Uh Not in this case. So
You know, it's funny. I always assumed, you know, what I knew of the standard oil story before doing all the research was that it was

eighteen ninety Sherman Antitrust Act that
Brought down.
Standard oil.
It wasn't for another twenty one years. Indeed it was, yes, it was the Sherman Antitrust Act, but it was not for twenty one years.
Uh so the we'll close with the wild
Story of the
German antitrust bill.
So
Ohio.
Senator.
John Sherman.
brother of General William Tecumseh Sherman. No way. Great hero of the Civil War. Wow.
Unbelievable. You know how we joke about how there like must have been ten people in Silicon Valley in like the nineteen seventies and nineteen eighties? Right. I think there must have been like ten people in America at this point in time.
So Senator John Sherman.
in eighteen eighty nine, as like the sort of public sentiment is starting to shift against

huge octopus monopoly.
proposes an anti quote unquote anti trust bill.
In
The US and the federal.
Senate.
It turns out that just a few years earlier when
Sherman was running for office in Ohio.
Guess who one of his biggest campaign supporters was?
Uh Rockefeller?
Yes. That would be correct. So this is like
Like hmm, you're biting the hand that feeds you here.
Yeah.
So the acts, you know, does pass, but Sherman makes the political gamble that like the
political power and stature that he's gonna get from doing this is gonna be worth more than the money that he's gonna get from
Rockefeller and Standard going forward.
The act ends up passing in July of eighteen ninety.
Outlawing.
All trusts and business combinations in the United States of America
That were
This is the key modifier.
quote unquote, in restraint of trade.
But they don't define what in restraint of trade means.
It's up to some judge to set precedent.
And everybody thinks
Oh well.
There's no legal precedent for what that means. So
That's never really gonna become an issue. And in fact
Rockefeller and
Standard Oil viewed this as a win.
They were like oh.
Great.
The public is now gonna feel like
The US government has taken action.
They have heard the
They're gonna curtail standards power, but they're not actually gonna curtail anything that we do. We're gonna keep
Doing.
Exactly what we've been.
Doing.
And in fact.
When Sherman runs for reelection in Ohio the very next year in eighteen ninety one, do you know who
Once again, one of his biggest donors was
Is it?
Rockefeller again. It is John D. Rockefeller. How funny is that? 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.
Hm.
Fascinating.
So in eighteen ninety six, Rockefeller is like
Well
Guess it's been a good run. I'm gonna hang it up. I'm gonna retire. I'm gonna focus.
On my philanthropy.
And I'm gonna leave one of my lieutenants, John Archbold, and my son, John Rockefeller Junior, who's about to graduate from Brown University.
I'm gonna leave them in charge.
I'm gonna go retire to my estate and I'm gonna focus
On
Doing good works.
But
Key mistake.
He didn't fully
Leave.
No.
No, he did not. He's like, Well, just in title only, I'll kinda stick around as president, right? Or as chairman. But of course that's not how the public would view it. They're like, No, your name's still on the door. Oh, he's gonna get dragged back to the witness stand.
In the years to come.
So no no sunset ride off for him.
Yeah, what a story.
All right listeners.
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I wanna talk a little bit about like the we used to do these narrative sections when we do IPOs. I wanna talk about like the public sentiment versus Rockefeller's defense.
So like
The public sentiment here and when we say public, it's less at
this point in history, the actual public and more about their competitors.
who are sort of making a bigger deal out of this'cause
All the public knows is
There's this really big company.
They provide things
kerosene mostly that I use in my life and it
gets to me in a consistent way at a stable price.
Like it is good for consumers. Like if you think about the consumer welfare standard.
of antitrust.
This really isn't bad for consumers. It could get there.
if standard oil is the only company and they sort of wield that power to raise prices and stuff like that.
But at this point it's really like
their competitors hate their guts. And especially anybody who's sort of
been coerced to cooperate with them, the railroads, the pipelines, like anyone in their orbit, the retailers.
Like
It sucks for them too.
And so you've got this beginnings of like
Really
Stirred up.
public sentiment against this company that's like
By some views.
you know, the most evil capitalist structure of all time.
Americans ever since we got here from England, and you know, my family immigrated at some point, so I certainly didn't come from England but
Ever since the original Anglo people came over from Europe and settled America, there's been this incredible
hatred of monopolies, in particular because
Our country was founded on
Equality and
people having the right to be free and the free market
Like the government was a monopoly in England, and that's what we were running from. Well, and still to this day, there's like huge
scepticism amongst
Americans.
Of
Centralized.
Government.
Power.
Right.
So even there's this interesting, like, 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.
And I didn't like it when it was concentrated in a government and I don't like it now when it's concentrated in the rich people.
And that shows up all the way through to today. I mean that that's a the defining characteristic of the national conversation now.
And of course, Rockefeller's defense to all this is saying
Look, social Darwinism is bad.
Without Standard Oil rolling everyone up, you just have
All these people producing
non-standard products that consumers can't tr they're gonna kill this industry that could make everything great because consumers won't trust it. All these businesses will go out of business because the prices are so low, because every time there's a gusher, you know, the prices drop so much. These people are all gonna go out of business anyway.
And
Standard oil is the antidote to social Darwinism, which is bad, which is killing the golden goose here.
And so
The way he sort of makes this argument is
It was a cooperative success. It was for the general good
It was our moral imperative, it was downright Christian.
for me to do this and provide this service.
And certainly any of the
competitors or suppliers or partners or the like who ended up
Taking standard oil stock.
got fabulously wealthy by doing so. Like how could you argue that that was bad for them?
he really seems to have deeply believed that this like invisible hand, the Adam Smith concept of
you know, the the invisible hand that sort of guides the free market.
that it kinda just takes too long and there's a lot of bad stuff that happens along the way. Like academically, sure it makes sense.
that the free market will work itself out.
But
When you actually look at the businesses today and the people running those businesses today, there's gonna be a bunch of hardships and dirt along the way. You might have whole industries that die out because they never sort of reach their full potential.
It's not
communist. And it's not social. It's this interesting like
uniquely American viewpoint on actually social Darwinism and free market capitalism is a bad thing.
And everybody just eating each other's lunch and eliminating all the profit in every industry.
and potentially to our own detriment is bad.
Chernobyl even talks about this, like in some
Ways.
What
Rockefeller was trying to do and what standard became
Shared just as much
intellectual grounding as with like Marx and communism as it did with
Adam Smith and capitalism.
It was this view that like
Hey.
Pure
individual competition
Is not actually like the most ideal
Status and like some form of collectivism, in this case collectivism in the form of
A company, standard oil.
Was the best path.
Yeah. And the place where it kind of falls down is where he sort of says
Look.
If we just snife fight to the death, someone's gonna win.
And ultimately.
That one is gonna be me.
Because I'm the best at this. And like he's probably right.
But
This notion of like
So therefore
Everyone should allow me to save them.
Yeah, truly in like a very
evangelical Christian way, like I'm gonna go and save
You know and and bring them into my
business church is very much how he sort of thought about it. And you come into the light and embrace the standard oil. Literally the light. I love it. And
just dripping with irony in the way that I'm drawing these parallels here.
It kinda falls down where like
him accelerating the death of all of these businesses.
And saying it was inevitable and at least they're getting some upside now.
The benevolence argument does seem to fall down there a little bit.
Perhaps maybe the most blatant example to me is uh the groceries.
Right, like that letter.
Sent out writing to grocers saying like if you don't do what we want
We're gonna metaphorically burn down your houses like it's unreal.
Right. There are places where like
It made sense for
him to exert his power to reorganize the industry for the betterment of all the producers involved and all the consumers.
But
those places are far more limited than the number of places where they actually reached and exerted their power.
Yeah.
Sidebar on the on the logo'cause it's uh
We'll we'll see if we can link to it in the show notes.
You'll recognize it when you see it. It's this red, white, and blue Oh, it's the Amoco logo now. Yeah, it's the Amico logo, yeah, yeah.
Amica was uh

But California was Chevron.
Is either Ohio or New Jersey.
I think it was Ohio that became Amico. I could be wrong on that. I think you're right. I'll fact check that one.
But yeah, it's this red, white, and blue oval.
with in the middle of the oval this like
Grecian column looking torch, like Olympic torch looking. Indiana.
Uh, Indiana. Oh, interesting.
Like a Lipic Torch looking.
Column.
With a fire burning on top of it.
And interestingly, I think the Standard Oil of Indiana company adopted a different logo, but then when they turned into Amaco, they
adopted a something that looks a lot more like the original standard oil logo.
Interesting.
The other thread I want to talk about here in narratives is
Rockefeller.
And standard oil as a organization.
But Rockefeller as a person is really like
the prototype of so much of American
Culture today. Like
He was simultaneously.
viewed as this like, you know, sinister villain.
And as this great hero.
You know, people hated him, but people wanted to be him.
Is that a rap lyric? I feel like it must be. Well I mean Jay Z would name uh you know his uh
His label Rockefeller Records, like you know, there's a reason for that.
But like everything that like I feel like the public feels about Bezos, Zuckerberg, Musk, you're like everybody
all these billionaires today. Like
This was the prototype. This was the first time that Americans felt this way. There's this great quote in in Titan.
It says
The general public was of two minds and viewed the new entrepreneurs as

As alternatively.
Sinister and heroic.
By eighteen eighty eight, Rockefeller began to pop up in fawning magazine features about rich Americans.
But he was also singled out as a notorious dealer.
trust king in Joseph Polister's world and other
Papers.
The press kept up an editorial drum beat.
Against
Standard oil demanding vigorous state.
and federal antitrust action.
At the same time that he's in like the equivalent of, you know, like Vanity Fair as like the new elite. And I think he started embracing that later. For a while his policy was don't talk to the press.
And then sort of later started opening up to this idea of like, geez, maybe it's probably a good idea for me to have a positive image out there. Like silence is not doing me any favors.
Yeah.
All right.
Power.
Ooh power.
Okay, so what are what are power categories here?
So uh as Hamilton Helmer would uh put forth in his wonderful book Seven Powers.
Counter positioning, scale economies, switching costs.
network economies, process power, branding, and cornered resource.
And what I would
put forth here is
I think
And I haven't rigorously looked at each one.
I think
standard oil at various points in its first
twenty, twenty five years of existence.
Exerted every single one of these.
But the
domineering one, the one that enabled them to do everything that they did with scale economies.
No argument from me on scale economies being the most important one here. I mean, literally that was
All the machinations with the competitors, with getting the volume in the lakeshore deal.
Uh, with doing the deals with the railroads. It was all about economies of scale, so
For sure.
What's your thought on counter positioning?
I think in being a pure play refinery that was located in a different location than the
Like, is there a reason that no no one else should have done an off site
refinery because they had too much vested interest in an on-site refinery. I'm not sure.
I'm not sure that it was there's any reason why they couldn't.
But I think all the folks who are in the producing world, like the drilling and the crude world, they were just so
It was just such a gold rush mentality that like it was not professionalized, yeah.
They were just chasing the quick profits and like they were distracted. They weren't thinking long term, but I
I don't think there was any reason why they couldn't.
Have set up.
refining businesses in other locations. The counter positioning feels a little thin.
Yeah.
All the others that like switching costs for sure. Uh, with the all the railroad deals and then the tank cars and
All that.
Network economies. Yeah. I mean they build
The retail distribution with the standard cans and uh
Actually, is that all scale economies though? Is there any network effect here where
It's better for one customer.
that other customers exist.
Does anybody ever sort of have a relationship between customers?
Oh, that's a good question. Maybe not.
I mean, network economies were certainly less common in a pre telephone era.
Yeah, maybe not. Maybe that's more of a stretch.
Process power, certainly, especially over time as it got more and more complicated.
branding. I mean they named themselves standard and then they became that.
Yep.
And then
Yeah, I mean they had lots of
cornered resources. Eventually they cornered the resource on all the crude in the eastern United States.
'Cause they eventually actually owned all the land rights, right? To actually produce the Yeah, they did eventually get into exploration and production. I think when it was
You know, it was much later. I wanna say it was in the eighteen eighties, eighteen nineties, maybe when
Big oil deposits started being discovered elsewhere in America.
Yeah. And then they get they got in into that in in bigger ways.
Fascinating.
Cool with moving a playbook.
Let's do it.
So I have one playbook theme that we didn't
Touch enough the rest of the episode. And I have sort of a long quote.
And this is in particular around the period where there's a lot of fluctuation in prices, there's a race to the bottom, lots of people are going out of business, and this is sort of
Rockefeller.
Talking about how they're gonna weather the storm and, you know, swallow everyone else up.
What made an expeditious shutdown of outmoded rivals vital to Rockefeller was that he borrowed heavily to build gigantic plants.
So that he could drastically slash his unit costs.
Even his first partner, Maurice Clark, remembered that the volume of trade was always what he regarded as paramount importance
Early on, Rockefeller realized that the capital intensive refining business
In this business, sheer size mattered greatly because it translated into economies of scale.
Once describing the foundation principle of standard oil.
He said it was the theory of the originators. The larger the volume, the larger the opportunities for the economies, and consequently, the better the opportunities for giving the public a cheaper product without the dreadful competition.
of the late sixties.
ruining the business.
During his career, Rockefeller cut the unit costs of refined oil almost in half, and he never deviated from the gospel of industrial efficiency.
Mm.
There's so much tied up here, but one of them is
This is
kind of the first venture capital business.
Like we talked a lot on the T SMC episode about
these massive fixed costs. I mean, they're investing a hundred million dollars in fabs over the next three years.
And then it's all a volume game. Like how much can you get the plants at full capacity as fast as possible because
the unit costs can be super small'cause your your variable costs are super low, but it's all about that
Gigantic capital investment of the fixed costs.
I love it. There's the T S M C payoff. I love it.
Two hours later.
That I was just thinking the whole time as you were reading that quote was uh
Andreessen, Mark Andreessen, strength leads to strength, right?
This is the original strength leads to strength business.
Totally. And this is him justifying rolling up all these other producers where he's basically like, look, the best thing for consumers is to run as much consumer demand through one capital structure as possible. So we can just absorb all the fixed costs and then make the variable costs as low as possible.
Uh.
It'd be fun to think about.
We're on such a kick here with these like types of businesses.
Is there ever a kind of business or industry where like
Not scale economies per se, but this broader maximum of strength leads to strength.
Is that ever not the case?
Uh, it's always the case, I think, but it's like in varying strokes.
Especially where industries where there's not fixed costs or where there's low fixed costs. Like think about a restaurant business.
Assuming that you don't own the building and you're you're leasing everything and you even lease the equipment, then you're like, Jeez, what is really the
You know, the capex. You're kinda just like
at the whim of can you produce a better product and get a little bit more margin than your
You know, the person down the street.
Maybe this is uh kinda similar to the it also would apply to the restaurant business, like
Any time where
If you're
competing on like the highest end of quality.
Like I'm thinking like a fine dining restaurant.
That's a kid where strength might lead to strength in terms of its brand, but if it were to like raise a bunch of capital, expand
go have a you know uh a bunch more restaurants. Yeah, it's value destructive.
Yeah.
Okay, that's a case where strength
wouldn't lead the strength in the same way. But
So many.
Venture capital.
businesses and businesses that scale.
as large as we're talking about in the last few episodes we've been talking about like the largest businesses the world has ever known.
Yeah, it's amazing how this dynamic applies.
Totally.
Well, for grading on this one, listeners, we are gonna combine
value creation, value capture, and grading.
We already talked a lot about
the component of this value creation section where how does the value created for the world compare to value destruction? I think we've talked a lot about that in this episode, but we haven't spent a lot of time on like
How does the value that Stater Oil created
compare to the value that they captured for themselves.
Which I think is sort of the interesting one to look at here. And like a terrible example is Wikipedia, where there's no company that creates any more value in the world but captures so little of it.
Whereas you look at a Google and
They create a lot of value, but they're enormously profitable based on it.
And so some interesting numbers with standard oil. So we know that
They
You know, we're responsible for this sort of like kerosene.
Boom in the United States.
And the world.
And I think let's save the gas car conversation for the next episode. And I absolutely want to have a conversation around climate. And I think we should save that for the next episode too. But in this one, let's just look at the shape of the business by this period of time.
So
Standard oil in the mid eighteen eighties employed a hundred thousand people.
Which
That's probably the first time a company
ever employed a hundred thousand people.
Governments probably did, but did corporations
It would be hard to imagine.
Especially in a world where there are only thirty million people in the United States.
Totally.
They had dividends of between fifty and two hundred percent to all shareholders per year, which of course were private shareholders. It was mostly Rocfeller and his partners. I just want to underline that again. That's falling out of control. That's a very, very profitable business. Oh my God. The amount of capital invested in the business.
Literally anywhere from half to two times that.
being dividended out to shareholders every
Single.
Year.
While you continue investing capital and growing.
Ball so hard.
They want to find you.
Yeah.
Uh, and then the last thing I wanna throw out is this period between eighteen ninety, where we're ending this episode to nineteen hundred, they grew tremendously. So they had annual earnings where we're leaving the story off of somewhere between ten and twenty million dollars.
Which
Inflation adjusted is like a thirty X, so it's really like
three to five hundred million in terms of the amount of
earnings profit that they were generating per year in today's dollars.
By nineteen hundred
They sixed that.
So over a decade they actually grew
tremendously. So it sort of depends whether we're thinking about the business
in this ten to twenty million dollar era or in the like sixty plus million dollar era, you know, by the turn of the century.
But
I think that gives you a good shape of like
This is a business.
That was
Spinning off cash, David, the way that you were just
Describing for us.
that employed a hundred thousand people.
that kept America and Europe's lights on.
And
because it's been so long since this happened, we don't have like
SEC filings telling us
here's literally the amount of value they were able to capture versus create. But I think
the way I would sort of look at this one and talk about this is
Uh 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
Yeah.
their competitors participate in the upside that they were creating.
Or partners.
Well, and I think even um
The numbers that we have uh scant.
uh data such as it is. Again.
Wish we had.
Pitchbutt back in the day. But uh
The numbers that we have I think are also misleading.
They do seem a little small. You're like, Wait a minute, you guys are talking about how this is a business on the scale that no other business in America has ever been before.
But inflation adjusted, you know, even in by nineteen hundred, you're talking about a few billion dollars of cash flow that's dwarfed by companies today.
But
I don't think these numbers tell the whole story.
Because
So much
Of
Capital.
In this
business was A being recycled.
And be
not accounted for because of the crazy
Decentralized trust structure.
We'll talk about this much more in the next episode, but when it ultimately gets broken up.
You know, you said at the top of the show the children companies that come out of standard oil
Exxon, Mobile, Chevron.
the bulk of BP British Petroleum now, like Amco, like all of these companies.
You know, it wasn't until the rise of the Fang era in the last ten to fifteen years
Before that, ExxonMobil was by far the largest market cap company in the world, and that was just one.
of the children that came out of this company.
The value that was tied up here was
Immense.
That's a much better way to look at it, you're right.
I also think inflation adjusting these things is probably the wrong way to look at it. I was thinking about this more in the context of
Rockefeller's personal wealth, which will
dissect in depth on the next installment here.
But
Sure, you can inflation adjust wealth.
And you can inflation adjust profits, but really what you should be doing is looking at them as a percentage of the GDP at that time. Right.
And so like let's look at nineteen hundred. So standard oil
in nineteen hundred produced sixty million dollars in earnings.
And rather than inflation adjust that.
Let's look at it relative to the total GDP, which was twenty four
billion dollars.
Okay, so sixty million dollars divided by twenty four billion dollars.
So
Point two five percent
of the entire country's GDP
is standard oil's profits.
And I expose GDP really would be based on revenue.
So
You know, assuming they had
I don't know, thirty three percent operating margins. I'm kind of pulling a number out of thin air, but that feels reasonable.
Well
I don't know how they're defining profits here. I don't think this is gap account. Gap accounting doesn't even exist at this point in time. That might be the dividend. The annual dividend. Oh, the earnings being the Yeah. No, the dividend'cause when the data source we pulled this from had dividends differently. Let's assume
that standard oil's revenue represented something like one percent of America's GDP. Probably a little bit shy, but something like that.
That I think is the right way to frame
The amount of money that was flowing through this one company at the time. Yeah.
Wow.
That is a significant scale.
Yeah.
So I think the question is that you know, that we wanted to ask on grading is like
Standard oil becoming a monopoly in this way.
versus
If the industry were to have played out with unfettered
individual competition.
Which of course is a counterfactual that we have no idea, but how can we get a sense of what the shape of that could have looked like?
You know, it's interest this really like this makes me think about
China. What's going on in China right now?
You know, I think
The
Chinese political economic philosophy.
Is
really aligned with the standard oil view of the world, right? Which is that like
Unfettered competition is fine in the early days of an industry.
But then you gotta come in and you gotta like
Consolidate it. You can consolidate it through
The government's hand, in the case of China.
In this case, it was through Rockefeller's hand.
But that's what you need to enter a phase of maturity in an industry. And as we were just saying, you know, Rockefeller's argument is like all of this was good for consumers. This was great for consumers. This was great for
America.
It's like in the
most recent Amazon letter to shareholders when uh Jeff Bezos calculates the amount of consumer surplus
He's like, if you look how much Amazon shareholders have profited on us existing, Amazon employees have profited, and Amazon customers
It's by far the customers who have won.
Yes, uh
So good.
Basus student of history.
But yeah, Rockefeller's making the same point here. I think it's really interesting.
Yeah, well again, counterfactual, impossible to know, but there is definitely a world where
The kerosene industry doesn't develop in anywhere near
the same scale or impact or size.
I'm gonna throw this out there and say I think the world would end up uh no different of a place. I think it would have been totally net even and the only difference would be that the
you know, Rockefeller Family Foundation wouldn't be as large. I think give or take a few years, I think the whole thing would have played out pretty similarly and we would have ended up in the same sort of
major players in the oil world that we have today.
Yeah.
And maybe.
All of the
The standard oil children, the Exxons, the Mobiles, the Chevrons, et cetera.
But it developed anyway.
That could have been independent Cleveland refinery, you know, growing on their own and not being a part of standard oil and then having to get spun out.
That's a really good point. I mean, Rockefeller was
A genius in so many levels. He brought the like Morris Chang level of
Thought.
And discipline to the business.
But eventually other people would have done that too.
Yeah.
I mean it might have been a little more annoying where like you had to get
those two types of kerosene sitting next to each other on the shelf and you had to go make sure to buy the compatible one for whatever apparatus lamp you had at home and that would have been a slight bummer.
I don't know.
I think
Rockefeller made a lot of arguments that served his purpose.
And as fun as it is to sort of imagine and sort of theory craft
why he was right and how that would have played out.
I think
Net net.
We would have consumed about the same amount of oil between then and now, consumers would have spent about the same amount of money on oil between then and now, and we would have about the same number of players we have today.
So
Let's see if I can translate right. It sounds like you're arguing for like a grade of like a C, like a passing grade.
Oh, it well, it depends what we're grading. Like d d uh in in terms of creating a bunch of value and capturing as much as he possibly could, A plus. Right, right, right. Uh in terms of the grade of like
The development of this industry in America.
Uh as it did.
versus a non standard oil path.
Yeah, I guess that is what I'm arguing.
What do you think?
I'm not feeling strongly any different way. I think that's a really good argument.
You know, it's funny, I feel like
If Peter Thiel were here as a guest with us, he would be vehemently arguing the opposite.
that you know it's the zero to ones. It's the like
Yes, anybody could have done this.
Yes, you know, other people might have, but like Rockefeller did it.
And in the absence of somebody doing it.
That it might not have happened.
And without all this standardization in the oil industry, then we wouldn't have had all the
unbelievable lifestyle upgrades that we've all had over the last
Hundred and fifty years because of the advent of
Unified.
oil ecosystem.
Yeah. Like
You like your electric cars and Teslas and the like. Well, you know, no kerosene back in the day, no gasoline thereafter, you know.
We don't advance to the level of
technology and development that we're at now.
Oh, like if the car was
much more inconvenient to drive or that to wait another thirty years to develop. I mean
then like there's a zillion knock on effects of uh America doesn't innovate in all sorts of other ways and people don't have a lot of other products that we all take for granted in our lives now.
Yeah.
Alright, so I think my answer.
I don't have a strong point of view. I think I'm gonna go a notch higher than you to uh
B.
Just because I really do see both sides here.
One side being
the argument that like this all would have happened the same way anyway, and the other side being
Yeah, but really.
You need Rockefeller, like no Rockefeller, it doesn't happen.
Mostly though the the other reason I'm gonna go with the B is I just really love telling this story. Well that that I could tell. I could tell.
All right.
Carvouts.
Carve outs.
Let's
Yeah.
Two for me, both are related, the first more related than the second.
The first one is uh the movie There Will Be Blood with Daniel Day Lewis. If you are Jonesing for some
Good old fashioned, extremely violent.
Early oil days.
I think it's like I mean I wasn't there, so I've no idea, but unbelievable articulation of what it would be like to go and prospect an oil field.
And uh
risks involved in that and the personalities involved in that and the deception and the
the way that rogue entrepreneurs were organizing labor and capital to make these things happen.
I saw the movie maybe six months ago, but I I thought about it so many times.
Especially in regards to like Titus Phil and some of those in uh
in researching this. And my second is
Only tangentially related because it is actually about a gold rush, not the oil rush.
But the TV show Deadwood.
Timothy Holophant.
I've heard that that's very good. It's excellent. I am one of three seasons in right now. I just finished the first season.
It's so good. The characters so compelling. The acting's great.
I actually got tipped to it when I was doing the research for
The Andreessen Horowitz episode, Mark I think mentioned that it was his favorite TV show. And so I was like, I should check that out if it's Mark Andreessen's favorite TV show. And sure enough.
It's awesome.
It used to be um
The Halton Cast Fire.
Show. Oh really? Which is also great.
Yeah, he talked I've never seen it, but which I mean, given what we do here, I need to watch it.
You do. So
Go watch Deadwood.
It's awesome.
Nice. And uh there will be blood. I've never seen it. I'm like so
Living under a rock. Oh man. You need to see that in Gangs of New York. Yeah, which I also have never seen, huh.
My carve out is completely
Unrelated.
I'm sure I could think of some the the standard oil octopus tentacles reach so far that I probably could think of some connection, but I'm not going to
Is
The secret base.
YouTube channel, which is part of SB Nation.
Uh
Sports uh news website.
It's
So good. And in particular I've I've liked this uh this channel of their work for a long time. These guys are so
They just do like irreverent histories of like
Sports.
Moments and teams.
In particular, they just did a seven part series on the Atlanta Falcons. It's probably like five or six hours in total.
And it's so good. It's so funny and just like so
The whole like premise of the history.
It is
They do a lot of great graphics.
On the channel. So they take
A visual representation of the win loss differential for the team.
Where like, you know, if the the horizontal x axis is a five hundred record
And then going down below is
Losing and then going up above is a winning overall record.
And basically the whole history of the Atlanta Falcons.
They're
Wing as they call it, because it's all, you know, losses down into the red.
almost exactly mirrors the Falcon's logo that if you like tilt it up on its side so that the X axis becomes vertical.
It really looks like the Falcons logo.
Brutal.
It's so funny. But yeah, very, very well done. Highly recommend.
Sorry to any Falcons fans out there.
Oh, but it's like a love letter to to Atlanta and the Falcons. Like it's so fun.
I don't think I made this my carve out, but they did one on the Mariners.
A year or two ago. That was equally
Equally good. We'll link to that one too.
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