First, it is well-known that Ida Minerva Tarbell’s series of muckraking articles on Standard Oil, published in McClure’s magazine and later collected and expanded into the two-volume 1904 book The History of the Standard Oil Company, generated much of the impetus behind state and federal antitrust suits against Standard Oil of New Jersey (Jersey Standard). Less well known is that Tarbell’s brother William, who was the treasurer of Pure Oil, one of Standard’s chief rivals at the time, supplied inside-industry information to his sister and vetted her articles and book. Second, Ida Tarbell’s grievances against Standard Oil were crystallized by her belief that Rockefeller’s creation of the railroad tanker car for shipping crude oil from field to refinery had ruined her father, a manufacturer of wooden barrels used for the same purpose. Third, while in the late 19th century Standard Oil accounted for as much as 90 percent of the nation’s production capacity for refining crude oil into kerosene (the chief petroleum product of the day), by the time the Supreme Court heard the evidence in Standard Oil and issued its decision in 1911, the discovery of vast new oil deposits in West Texas (and the emergence of competitors like Texaco and Gulf Oil, along with entry into the American market by the combination of Royal Dutch and Shell following the 1909 repeal of a protectionist tariff) had reduced Standard’s share of the refining market to less than 70 percent. Fourth and finally, rather than chastening Standard Oil’s owners, the company’s court-ordered dissolution tripled Rockefeller’s wealth, nearly making him history’s first billionaire.

In what follows, I offer a critical appraisal of the Justice Department’s lawsuit, casting doubt on the celebratory tone adopted by many commentators on Standard Oil. The case illustrates a common feature of antitrust law enforcement: Complaints against ostensibly anticompetitive business practices frequently originate from rivals of the defendant company, ignore the interests of the industry’s customers, and interfere with rather than promote the operations of competitive market processes.

Historical Background

Ron Chernow’s 1998 book Titan, one of the best biographies of a captain-of-industry ever published, portrays Rockefeller as a relentless and effective seeker of innovative ways to cut costs across the Ohio-based company founded in 1870 that ultimately became the Jersey Standard “trust.” (One example supplied by Chernow relates to reducing by one the number of drops of solder used to seal cans of kerosene shipped overseas. Over time, that one drop saved Jersey Standard “hundreds of thousands of dollars.”) In fact, “Standard” was part of the corporate name to signal to customers and investors the consistent quality of its refined product, eliminating the impurities present in the final products of competitors that were responsible for killing 3,000 users every year in kerosene-lamp explosions. Moreover, because kerosene was much cheaper as an illuminant than the whale oil it replaced, Rockefeller could be credited with saving the leviathans of the great ocean depths. Like the meat processors in Upton Sinclair’s The Jungle who “used every part of the pig but the squeal,” Rockefeller encouraged Jersey Standard’s scientists and engineers to extract every possible “fraction” from barrels of crude oil, including formerly discarded black gunk, from which the unappealing color and other impurities were removed and then marketed as Vaseline petroleum jelly.

Standard Oil had been targeted by lawsuits at the state level since the early 1880s, starting with Ohio and followed by Texas, Tennessee, and Missouri, among others. Bringhurst 1979 reports that 33 separate complaints were filed against Rockefeller’s company between 1880 and 1911. However, it was not until Ida Tarbell portrayed Jersey Standard as a rival-crushing “octopus” that concerns about the company’s business practices reached the federal courts. Following an investigation by the US Industrial Commission, before which William Tarbell’s boss at Pure Oil was a leading witness, the US Department of Justice charged that Standard Oil had unlawfully restrained trade, thereby violating the Sherman Act.

Jersey Standard was vertically integrated, with gathering operations in Pennsylvania’s oilfields, refineries in Ohio, and distribution of petroleum products at home and abroad. In a decision handed down on May 15, 1911, Supreme Court Chief Justice Edward White announced that Standard Oil would, within six months, dissolve itself into some 34 constituent companies, supposedly forcing competition in markets where none had existed before (Reksulak and Shughart 2012). At the same time, the Court formulated a “rule of reason” whereby it would not condemn every alleged restraint of trade, but only ones determined to be “unreasonable.” Standard Oil represents one of the federal government’s first successful (and perhaps its most renowned) prosecutions of a “monopoly.”

Jersey Standard and the Railroads

Ida Tarbell and later critics of Rockefeller’s business practices spilled gallons of ink charging the company with building its market power on the backs of the railroads that transported crude oil from gathering fields to refineries. Of special critical concern was the South Improvement Company, an entity formed in the fall of 1871—coincident with the beginning of Standard Oil’s rise to dominance—to negotiate “secret” discounts on the rates Standard Oil paid the railroads for shipping services. The discounts or “rebates” on transportation costs that Jersey Standard received purportedly conferred on Rockefeller’s company competitive advantages over rival refiners of crude oil not so favored by the railroads.

Relatedly, some commentators have argued that Rockefeller partly built his refinery empire by engaging in unlawful predatory pricing, a business practice conceivably falling within the ambit of Section 2 of the Sherman Act, which proscribes attempts to monopolize a specified “line of commerce.” The allegation is that Jersey Standard selectively cut the prices of kerosene and other petroleum products, perhaps below its own or rivals’ costs, to bankrupt competing refiners and acquire their assets “on the cheap.” A plausible predatory pricing strategy requires the predator to recoup its short-run losses by raising prices (and profits) afterward without inviting new industry entrants. The evidence that Jersey Standard thus preyed on its rivals has been examined closely and found wanting (McGee 1958).

Conjectures about the South Improvement Company’s anticompetitive practices likewise fail for two reasons: First, and what is more salient, the scheme—a brainchild of the president of the Pennsylvania Railroad, supposedly designed to benefit Jersey Standard selectively in the form of shipping rebates and by allocating traffic across the major railroads (to moderate the ongoing railway rate wars)—never actually went into effect. Rockefeller’s critics, therefore, are forced to rely on the “threat” it posed to independent refiners, who quickly formed their own cartel to negotiate with the railroads. Second, railroads commonly offered rebates to the shippers of many goods, not just crude oil, before and after the South Improvement Company was conceived. Many of the costs of railroading are fixed: tracks must be laid, rolling stock acquired, and terminals built before one passenger can be carried or one ton of freight can be moved. Railroads can cover those fixed costs only by securing high and continuous volumes of paying traffic. That economic necessity explains why ruinous railway rate wars frequently broke out as individual railroad companies sought to attract customers away from competitors. It also explains why rebates were so common, especially for large shippers like Jersey Standard that could ensure full train loads, thus more efficiently utilizing the railroads’ track and terminal network capacities.

A barrel holds 42 gallons of crude oil. A modern railroad tanker can accommodate up to 30,000 gallons of crude oil, equal to about 714 barrels. The transportation cost savings from switching from bulky wooden barrels to tanker cars should be clear. However, because the cars had few if any alternative uses, the railroad companies were initially reluctant to invest in specialized oil tanker cars. So, Rockefeller built tankers in-house and leased them to the railroads, providing another justification for selective shipping rebates, which can be thought of as a means of sharing the joint gains from the transportation innovation introduced by Jersey Standard.

The economics of railroading (high fixed costs relative to variable operating costs) helps us understand why offering rebates to large shippers was a regular business practice that did not just benefit Jersey Standard. Evidence that Rockefeller became a leading crude oil refiner before accepting his first railway rate discount strengthens that conclusion. Handwringing about the South Improvement Company, Jersey Standard’s business relations with the railroads, along with its investments in pipelines aimed at exploiting a transport mode safer than surface rail for moving crude oil to refineries, should be put to rest.

Enriching Rockefeller

Chief Justice White’s order dissolving Jersey Standard into its constituent parts was issued in May 1911. Rockefeller was then worth about $300 million. By 1913’s end, he was worth more than $900 million. According to Chernow, President Teddy Roosevelt, the famous Progressive Era trustbuster who occupied the White House until March 4, 1909, reacted to news of Rockefeller’s newfound fortune by lamenting, “No wonder that Wall Street’s prayer now is: ‘Oh Merciful Providence, give us another dissolution.”

As mentioned above, dismantling Jersey Standard was the legal remedy proposed by the Justice Department to undermine the company’s alleged monopoly and promote competition in the markets for kerosene and other refined petroleum products. Dissolution was operationalized largely along horizontal lines. Among the 34 successor companies created in the wake of the Court’s order were regional players like Standard Oil of New Jersey (which later became Exxon and then ExxonMobil), Standard Oil of California (which became Chevron), Standard Oil of New York, Standard Oil of Ohio, and Standard Oil of Indiana. All such entities remained vertically integrated and, in fact, after the stocks of Jersey Standard were redistributed to the new companies’ shareholders, the successors were owned by the same people who had controlled the original “trust.” Eventually, the largest “Baby Oils” integrated forward into retailing by opening branded gasoline stations.

How can the surprising wealth effects of Standard Oil be explained? Reksulak et al. 2004 consider some of the possibilities: The remedy was expected to be ineffective, a Pyrrhic victory for the Justice Department as it were. Alternatively, investors may have anticipated the additional profits Jersey Standard would earn from the substantial increase in gasoline demand that was beginning to materialize. (Henry Ford produced the first Model T car in 1908, and 2.5 million of them would be on the road by 1915; gasoline sales outstripped those of kerosene in 1910.) Another possibility is that Jersey Standard’s shares were undervalued before the company’s breakup: Rockefeller refused to list his company on the New York Stock Exchange and did not issue annual reports to stockholders. The public trading of shares in the successor companies may have revealed information previously hidden from investors. Uncertainty about the company’s fate during the Justice Department’s five-year-long investigation of Jersey Standard and legal proceedings against it might have been resolved in May 1911 when the Supreme Court issued its ruling. Reksulak et al. find no empirical support for any of those explanations.

Although not tested directly, Daniel Yergin’s landmark 1990 book The Prize offers another intriguing possibility. Two years before Jersey Standard’s dismemberment, William Merriam Burton, a chemist employed by what became Standard Oil of Indiana, was given the go-ahead for a research project that led to the development of “thermal cracking,” a high-temperature refining process that, according to Yergin, “more than doubled the share of usable gasoline from a barrel of crude.” Burton’s proposal to move thermal cracking out of the laboratory and implement it at scale was deemed “foolhardy” at Jersey Standard’s headquarters. He was greenlit only after Indiana Standard became an independent company. The other successor companies ultimately copied the revolutionary process; the associated patents were even licensed for use by Standard’s competitors.

Yergin notes that the price of gasoline almost doubled, from 9.5¢ to 17¢ per gallon (the equivalent of $3.17 and $5.49, respectively, in today’s dollars) between October 1911 and January 1913. Thanks to Burton’s discovery of thermal cracking, Jersey Standard and its successors were in ideal positions to take advantage of that price increase. However, the available financial data, limited by the New York Stock Exchange’s closure at the outbreak of World War I in August 1914, do not confirm the hypothesis that gasoline prices drove Rockefeller’s post-breakup fortunes. As is customarily conceded by academics, more research is needed to identify the sources of Rockefeller’s unanticipated enrichment in the immediate wake of Jersey Standard’s dissolution.

What Can Be Learned?

Standard Oil was wrongly decided. The Justice Department’s complaint was instigated by Ida Tarbell’s lurid stories about the company founded by the man she blamed for wrecking her father’s wooden barrel business. The complaint was informed by insider stories told by Tarbell’s brother William, an officer for one of Jersey Standard’s competitors. William’s boss was an important witness before the US Industrial Commission, which played a high-profile role in spurring antitrust action against Rockefeller and his company. Self-serving personal interests thus animated the “mother of all monopolization cases.” In emphasizing the discriminatorily low shipping rates that supposedly allowed Jersey Standard to build a refining empire, the government’s Sherman Act lawsuit ignored the economics of railroading. Perhaps mesmerized by Jersey Standard’s sheer size, the prosecution also overlooked the benefits to consumers of Rockefeller’s innovative cost-cutting and implementation of refining processes that expanded the quantities and varieties of final products yielded by crude oil.

A key lesson from Standard Oil is that large business organizations, even privately owned ones, can be just as unwilling or unable to capitalize on innovations (like thermal cracking) discovered down the hierarchical chain as the most hidebound governmental bureau. A second lesson from Standard Oil is that prosecutors and the courts often fail to devise effective remedies for the anticompetitive behavior thought to have been identified. The post-dissolution tripling of the wealth of the company’s shareholders supports that conclusion.

Standard Oil thus joins a long list of cases in which antitrust enforcement has neither protected consumers’ interests nor significantly deterred allegedly unlawful business acts and practices (Crandall and Winston 2003). Finally, antitrust is fundamentally backward-looking: No one, including antitrust experts, can foresee the evolving landscape of a dynamically competitive market. Jersey Standard’s “monopoly” had already been weakened by new entry when the company was ordered to dismember itself. Skepticism is therefore warranted when, today, private and public antitrust complaints target “Big Tech” and other successful commercial enterprises.

Readings

• Bringhurst, Bruce, 1979, Antitrust and the Oil Monopoly: The Standard Oil Cases, Greenwood Press.
• Chernow, Ron, 1998, Titan: The Life of John D. Rockefeller, Sr., Random House.
• Crandall, Robert W., and Clifford Winston, 2003, “Does Antitrust Policy Improve Consumer Welfare? Assessing the Evidence,” Journal of Economic Perspectives 17(4): 3–26.
• Elhauge, Einer, 2003, “Defining Better Monopolization Standards,” Stanford Law Review 56(2): 253–344.
• McGee, John S., 1958, “Predatory Price Cutting: The Standard Oil (N.J.) Case,” Journal of Law and Economics 1(1): 137–169.
• Reksulak, Michael, and William F. Shughart II, 2012, “Tarring the Trust: The Political Economy of Standard Oil,” Stanford Law Review 85(PS): 23–32.
• Reksulak, Michael, et al., “Titan Agonistes: The Wealth Effects of the Standard Oil (N.J.) Case,” Research in Law and Economics 21: 63–84.
• Yergin, Daniel, 1990, The Prize: The Epic Quest for Oil, Money, and Power, Simon and Schuster.