EARLIEST DESIGNS FOR CONSOLIDATION INCLUDE PLANS TO HOLD UP THE PRICE OF OIL — SOUTH IMPROVEMENT COMPANY SO INTENDS — COMBINATION OF 1872-1873 MAKES OIL DEAR — SCHEME FAILS AND PRICES DROP — THE STANDARD'S GREAT PROFITS IN 1876-1877 THROUGH ITS SECOND SUCCESSFUL CONSOLIDATION — RETURN OF COMPETITION AND LOWER PRICES — STANDARD'S FUTILE ATTEMPT IN 1880 TO REPEAT RAID OF 1876-1877 — STANDARD IS CONVINCED THAT MAKING OIL TOO DEAR WEAKENS MARKETS AND STIMULATES COMPETITION — GREAT PROFITS OF 1879-1889 — LOWERING OF THE MARGIN ON EXPORT SINCE 1889 BY REASON OF COMPETITION — MANIPULATION OF DOMESTIC PRICES EVEN MORE MARKED — HOME CONSUMERS PAY COST OF STANDARD'S FIGHTS IN FOREIGN LANDS — STANDARD'S VARIOUS PRICES FOR THE SAME GOODS AT HOME — HIGH PRICES WHERE THERE IS NO COMPETITION AND LOW PRICES WHERE THERE IS COMPETITION
IT is quite possible that in keeping the attention fixed so long on Mr. Rockefeller's oil campaign the reader has forgotten the reason why it was undertaken. The reason was made clear enough at the start by Mr. Rockefeller himself. He and his colleagues went into their first venture, the South Improvement Company, not simply because it was a quick and effective way of putting everybody but themselves out of the refining business, but because, everybody but themselves being put out, they could control the output of oil and put up its price. "There is no man in this country who would not quietly and calmly say that we ought to have a better price for these goods," the secretary of the South Improvement Company told the Congressional Committee which examined him when it objected to a combination for raising prices.
Four years after the failure of the first great scheme, a similar one went into effect. What was its object? J. J. Vandergrift, one of the directors of the Standard Oil Company at that time, questioned once under oath as to what they meant to do, said: "Simply to hold up the price of oil — to get all we can for it." Nobody pretended anything else at the time. "The refiners and shippers who are in the association intend there shall be no competition." "It is a struggle for a margin." "The scope of the association is an attempt to control the refining of oil, with the ultimate purpose of advancing its price and reaping a rich harvest in profits." These are some of the comments of the contemporary press. The published interviews with the leaders confirm these opinions. Mr. Rockefeller, always discreet in his remarks, denied that the scheme was to make a "corner" in oil; it was "to protect the oil capital against speculation and to regulate prices." H. H. Rogers was more explicit: "The price of oil to-day is fifteen cents per gallon" (March, 1875). "The proposed allotment of business would probably advance the price to twenty cents. . . . Oil to yield a fair profit should be sold for twenty-five cents per gallon."
What was the exact status of this refining business out of which it was necessary to make more in the year 1871, when the first scheme to control it was hatched? The simplest and safest way to study this question is by means of the chart of prices below. [142] On this chart the line A shows the variation in the average monthly price, per gallon, of export oil in barrels in New York from 1866 to June 1, 1904. The line B shows the average monthly price, per gallon, of crude oil in bulk at the wells. A glance at the chart will show the difference or margin between the two prices. It is out of this difference that the refiner must pay the cost of transporting, manufacturing, barrelling and marketing his product, and get his profits. Now in 1866, the year after Mr. Rockefeller first went into business, he had, as this chart shows, an average annual difference of 35 cents a gallon between what he paid for his oil and what he sold it for. In 1867 he had from 26-1/2 to 20 cents; in 1868, from 20 to 22-1/2; in 1869, from 21 to 18; in 1870, from 20 to 15. [143]
The above chart is adapted from one published in the Report of the Industrial Commission, Volume 1, 1900, and is brought up to date. The figures at the right and left stand for the price per gallon in cents. The dates are placed at the top. The figures on which the export and crude lines are based are those taken from the "Oil City Derrick Hand-Book." Those on which the water-white line is based are from the Oil, Paint and Drug Reporter.
A shows the variations in the price per gallon of refined oil for export in barrels in New York. The price of barrels varies slightly, but is usually estimated at 2-1/2 cents per gallon.
B shows the variations in the price per gallon of crude oil in bulk at the wells.
C shows the variations in the price per gallon of water-white oil (150° test) in barrels in New York. This is the usual domestic oil.
The margin or difference between the price of crude and refined is easily calculated. Thus at the end of 1876 the crude line shows the price of crude to be about nine cents — the price of refined about twenty-nine; the margin was therefore twenty cents.
There were many reasons why this margin fell so enormously in these years. All of the refiners' expenses had rapidly decreased. In 1866 but two railroads came into the oil country; by 1872 there were four connections, and freights fell in consequence. In 1866 carrying oil from the wells by pipe-lines was first practised with success, by 1872 all oil was gathered by pipes, thus saving the tedious and expensive operations of teaming. Tank-cars for carrying crude oil in bulk had replaced barrels and rack-cars. The iron tank, holding 20,000 barrels, was used instead of the wooden tank holding 1,000 barrels. On every side there had been economies, and because of them the margin had fallen. But not only were the expenses coming down; so were the profits. The money which had been made in refining oil had led to a rapid multiplication of refineries at all the centres. In 1872 there was a daily refining capacity of about 46,000 barrels in the country, and the daily consumption of that year had been but 15,000 barrels. This large capacity produced the liveliest competition in selling, and every year the margin of profit grew smaller.
Now it is natural that men should struggle to keep up a profit. The refiners had become accustomed to making from twenty-five per cent. to fifty per cent., and even more, on every gallon of oil they put out. They had the same extravagant notion of what they should make as the oil producers of those early days had. No oil producer thought in the sixties that he was succeeding if his wells did not pay for themselves in six months! And as their new industry slowly but surely came under the laws of trade, increased its production, was subjected to severe competition, as they saw themselves, in order to sustain their business, forced to practise economies and to accept smaller profits, they loudly complained. There was never a set of men who found it harder to accept the limitations of economic laws than the oil producers of Pennsylvania. The oil refiners showed the same dislike of the harness, and in 1871, as we have seen, Mr. Rockefeller and a few of his friends combined to throw it off. What they proposed to do was simply to get all the refineries of the country under their control, and thereafter make only so much oil as they could sell at their own interpretation of a paying price.
There was not enough profit in the margin of 1871. Now what was the profit? According to the best figures accessible of the cost of oil refining at that day, the man who sold a gallon of oil at 24-1/4 cents (the average official price for that year) made a profit of not less than 1-1/4 cents — 52-1/2 cents a barrel. [144] Josiah Lombard, a large independent refiner of New York City, when questioned by the Congressional Committee which, in 1872, looked into Mr. Rockefeller's scheme for making oil dearer, said that his concern was making money on this margin. "We could ship oil and do very well." A. H. Tack told the Congressional Committee of 1888, which was trying to find out why he had been obliged to go out of the refining business in 1873, that he could have made twelve per cent. on his capital with a profit of ten cents a barrel. Scofield, Shurmer and Teagle, of Cleveland, made a profit of thirty-four cents a barrel in 1875, and cleared $40,000 on an investment of $65,000. Fifty-two cents a barrel profit then was certainly not to be despised. The South Improvement Company gentlemen were not modest in the matter of profits, however, and they launched the scheme whose basic principles have figured so largely in the development of the Standard Oil Trust.
The success which Mr. Rockefeller had in getting the refiners of the country under his control, and the methods he took to do it, we have traced. It will be remembered that for a brief period in 1872 and 1873 he held together an association pledged to curtail the output of oil, but that in July, 1873, it went to pieces. [145] It will be recalled that three years after, in 1875, he put a second association into operation, which in a year claimed a control of ninety per cent. of the refining power of the country, and in less than four years controlled ninety-five per cent. [146] This large percentage Mr. Rockefeller has not been able to keep, but from 1879 to the present day there has not been a time when he has not controlled over eighty per cent. of the oil manufacturing of the country. To-day he controls about eighty-three per cent.
Now it is generally conceded that the man or men who control over seventy per cent. of a commodity control its price within limits, very strict limits, too, such is the force of economic laws. In the case of the Standard Oil Company the control is so complete that the price of oil, both crude and refined, is actually issued from its headquarters.
Now, with the help of the chart, let us see what Mr. Rockefeller and his colleagues have been able to do from 1872 to 1904 with their power over the price of oil. The first association which worked was brought about late in 1872. What happened? Prices for refined oil were run up from 23 cents a gallon in June to 27 cents a gallon in November, and the margin increased from 13.6 cents to 17.7 cents. From a profit of about 1-1/2 cents a gallon they rose to one of over 4 cents. Unfortunately, however, the refiners of that period were not educated to the self-restraint necessary to carry out this scheme. They very soon failed to keep down their output of oil and overstocked the market, and the whole machine went to pieces. Mr. Rockefeller had been able to make oil dear for a short time, but only for a short time. Worse than that, what he had been able to do brought severe public condemnation. It had, indeed, produced exactly the result the economists tell us too high prices must produce — limitation of the market and stimulation of competition in rival goods. Mr. Rockefeller's second scheme to work out the good of the oil business by making oil dear resulted in decreasing oil exports for the first time since the discovery of oil. [147] It also increased one of the chief grievances of the American refinery — that was, the exporting of the crude oil to be refined in Europe. Where the exports of crude had been something over eleven million gallons in 1871, they were now over sixteen millions. And it set the shale-oil factories of Scotland to work merrily. It was cheaper for Great Britain to use oil from Scottish shales than to buy oil sold under Mr. Rockefeller's great plan for benefiting the oil business. So for the time the scheme fell down.
As the diagram shows, the margin dropped rapidly back after this brief success from eighteen to thirteen cents, nor did it stay there. With the return of competition, in the fall of 1873, it continued to drop rapidly. By the end of the year it was down to eleven cents; by the end of 1874 to nine. What had done it? A decline in expenses, coming from the multiplication of pipe-lines, reduction in freight charges, and free competition in the markets. Nothing else.
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