In spite of the obvious economic effects of his scheme in 1872 Mr. Rockefeller did not give up his theory that to make oil dear was for the good of the business. He went steadily ahead, developing quietly his plan of a union of all refiners, pledged to limit their output of oil to an allotment he should assign, to accept the freight rates he should arrange for, to buy and sell at the prices he set. It was a year before the alliance was nearly enough complete to make its power felt. By the summer of 1876 it claimed to have nine-tenths of the refiners in the country in line. At that time a situation rose in the crude oil market well calculated to help it in its intention to raise prices. This was a falling off in the production of crude oil. An advance in its price had come in the summer of 1876. Refined had, of course, responded to the rise. But as the fall came on and the exporters prepared to load their cargoes, the syndicate demanded a price for refined much above that for which the market price of crude called. The embargo which followed has already been described in Chapter VII of this narrative. It was as straight a hold-up as our commercial history offers, rich as it is in that sort of operations. From October to February refined oil was held at a price purely arbitrary. It was the first fruits of the Great Scheme.

The winter's work was a great one for the Standard Combination. It not only demonstrated that Mr. Rockefeller was correct in his theory that the way to make oil dear was to refuse to sell it cheap, but not since the coup of 1872, with the South Improvement Company, had Mr. Rockefeller reaped such rewards. The profits were staggering. One of the leading gentlemen in this pretty affair told the writer once that he had sold one cargo at thirty-five cents a gallon, oil which cost him on board the ship a trifle under ten cents. To-day one-fourth of a cent profit a gallon is considered large on export oil. The Standard Oil Company of Ohio had always paid a good dividend, [148] but the year of this raid, 1877, it surpassed all bounds. On a capitalisation of $3,500,000 it paid $3,248,650.01, only a fraction less than 100 per cent. One of its stockholders, the late Samuel Andrews, when on the witness-stand in 1879, said they might have paid the dividend twice over and had money to spare.

The profits were great, but notice the forces set in motion by this coup. The exporters were angry. The buyers in Europe were angry. If the Americans are going to force up prices in this way, they said, we will not buy their refined oil. We will import their crude and refine it ourselves. We will go back to shale oil. A first result, then, of this attempt to hold prices up to a point conspicuously out of proportion to the raw product was that the exports of illuminating oil fell off — they were less by a million gallons in 1878 than in 1877. In the United States the market was threatened in the same way. There had been much trouble in the years just preceding these events with extortionate prices for gas — particularly in New York and Brooklyn. Illuminating oil was so much cheaper that it had been largely substituted, but this artificial forcing of the oil market in 1876-1877 caused a threat to return the next year to gas.

The effect on the refiners who were operating with Mr. Rockefeller in running arrangements was decidedly bad. Each refiner was under bonds to use only a certain percentage of his capacity, and to shut down entirely if Mr. Rockefeller said so. Scofield, Shurmer and Teagle, independents of Cleveland, who had yielded to the attractiveness of Mr. Rockefeller's scheme, and had gone into a running arrangement with him to limit their output, made $2.52 a barrel on their oil from July, 1876, to July, 1877! They had been satisfied with thirty-four cents profit a barrel the year before. Since making oil paid so well, why not make more? Why keep their allotment down to exactly 85,000 barrels, as they had agreed, when they were prepared to make 180,000? They did not. They put out a few extra thousand barrels each year. Others did the same. It was, of course, fatal to the "good of the oil business." Not only did these profits tempt many refiners to overrun their allotment; the few independents left profited by the prices and increased their plants; the great Empire Transportation Company combined refineries with its pipe-lines as Mr. Rockefeller was adding pipe-lines to his refineries. Thus competition was stimulated.

The effect on the men who produced oil was, of course, bad. They had found it impossible at any time, while the refined was kept so high, to force crude up to a corresponding point, though every effort was made. The producers threatened to combine and refine their own oil. When the Empire Transportation Company went into refining the producers heartily favoured the movement, and throughout the next year a severe competition kept prices down. The Empire was finally wiped out; the producers, aroused by this failure, combined against the Standard in one of the greatest associations they ever had. From 1878 to 1880 they fought continuously to restore competition. They secured the introduction into Congress of a bill to regulate interstate commerce; they fought for more drastic laws against railroad discrimination in the state of Pennsylvania; they persuaded the state to prosecute the Pennsylvania Railroad for discrimination; they indicted Mr. Rockefeller and eight of his colleagues for criminal conspiracy; and they supported by money and influence a scheme for a seaboard pipe-line connected with the independent refineries. [149]

If one will look at the chart he will see graphically the effect on Mr. Rockefeller's ambition of this fundamentally sound independent movement. The margin between crude and refined, thrust up to over twenty cents by the combination of 1878, fell rapidly under the combined efforts of the independents through 1877, 1878 and 1879. In the latter year it touched five cents for the first time in the history of the business. Competition resulting in economies, in a revolutionising transportation invention — the seaboard pipe-line — in a greatly extended foreign market, brought down this margin in 1879. Nothing else.

1876   TO   1880.

Fragment of chart, showing decline in margin after the coup of 1876 1877, caused by alliance of independent oil men and the success of the first seaboard pipe-line.

Those who have read this history know what became of the competitive movement of these years of 1878-1879. They remember how the Producers' Union compromised its suits and abandoned its efforts for interstate commerce regulation. They remember, too, how, just before the great seaboard pipe-line project was proved to be a success, all but one of the independent refineries were, by one means or another, persuaded to sell or to combine with the Standard, leaving the Tidewater without an outlet for its oil. Before the end of 1879 the Standard claimed ninety-five per cent. of the refining business. Now examine the chart for the effect on the price of oil in 1880, of this doing away with competition — another sudden uplift of the price of refined, this time without the excuse of a rise or probable rise in crude. For three years oil had not been sold so high as it was in 1880, when the exporters began to take on their winter's supply. An interesting contemporary account of this coup of 1880, and the way in which it was managed, is found in the excellent monthly Petroleum Trade Report, published by John C. Welch. It is dated November, 1880, and headed "Very Sharp Practice":

"There is made each day in New York what is known as an official quotation for refined oil, this official quotation being made as a matter of convenience in cabling the price of refined oil throughout the world. Refined oil not being sold at an open board, it is sometimes difficult to quote it accurately, but by having an 'official quotation' this can be quoted, and the difficulty is supposed to be, in a measure at least, remedied. The 'official quotation' is made by three petroleum brokers appointed by the Produce Exchange for that purpose, who meet each day after exchange hours for the purpose of establishing it. There is one party, and one party only, that have very large lots to sell, and so important a position do they hold in the business that their prices are ordinarily the market. Of course, to make transactions, their prices and buyers' prices have to come together, and transactions establish a market much better than prices offered to buy or sell at, but without transactions. At many times, if the Standard do not sell, there are no transactions, and, consequently, the Standard's asking price is leaned upon to establish an official quotation. During September, the official quotation went up from 9-3/8 cents to 11-7/8 cents, with comparatively little demand, as the foreign stocks were large, and very little oil was required to supply the world's wants. The upward movement was, consequently, purely arbitrary. Arbitrary prices are, however, a part of the Standard's every-day life, and I am not taking at this time any exception to them. All through October and up to November 13, the official quotation was 12 cents, or sometimes a little over and sometimes a little under, and as this price did not meet the views of buyers to but slight extent, the Standard were supposed to be exercising a Roman virtue in not selling. Twelve cents continued as the official quotation to November 13, without any wavering, but from the 13th to the 18th, while '12 cents asked by refiners' continued in the quotation, such sentences as these were included at different dates: 'Other lots obtainable at 11 cents.' 'Sales at 10-1/2 cents, offered at that.' 'Other lots obtainable at irregular prices, from 10 to 10-1/2 cents.' On November 18, the quotation was '10 to 12 cents.' I give the following quotation of the New York refined market as published in my Oil City daily report of November 11: 'The New York market yesterday closed, secretly offered and unsalable at 11-1/2 cents, and probably at 11-1/4 cents by resales and outside refiners, and likely by Standard, though they openly ask 12.'

"The point that seems apparent is that the official quotation of 12 cents ceased to be an honest quotation a considerable time before it was abandoned. The committee making the quotation can probably justify their position by the custom of the trade of regarding the prices the Standard openly ask as the market, nevertheless they, and the Produce Exchange whom they represent, were the bulwark from behind which the Standard were able to get off their hot shot against the consuming trade in the United States and the consuming trade in Europe, who all this time were buying Standard oil on the basis of 12 cents at New York, the supplies at the time being drawn from their stock in Europe and from their various depots in the United States."

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