The Grand Acquisitor

PrintPrintEmailEmail

From the beginning Rockefeller & Andrews, as the new firm was called, was a model of efficiency. Even before acquiring the firm, Rockefeller had become interested in the economics of plant operation. When he found thai plumbers were expensive by the hour, he and Sam Andrews hired one by the month, bought their own pipes and joints, and cut plumbing costs in half. When cooperage grew into a formidable item, they built their own shop where barrels tost them only forty per cent of the market price, and soon costs were cut further by the acquisition of a stand of white oak, a kiln, and their own teams and wagons to haul the wood from kiln to plant. The emphasis on costs never ceased; when Rockefeller & Andrews had long since metamorphosed into the Standard Oil Company and profits had grown into the millions, cost figures were still carried to three decimal places. One day Rockefeller was watching the production line in one of his plants, where cans of finished oil were being soldered shut. “How many drops of solder do you use on each can?” he inquired. The answer was forty. “Have you ever tried thirty-eight? No? Would yon mind having some scaled with thirty-eight and let me know?” A few cans leaked with thirty-eight, but with thirty-nine all were perfect. A couple of thousand dollars a year were saved.

The zeal for perfection of detail was from the beginning a factor in the growth of Rockefeller s firm. More important was his meeting in 1866 with Henry M. Flagler, the first of a half-dozen associates who would bring to the enterprise the vital impetus of talent, enthusiasm, and a hard determination to succeed. Hagler, a quick, ebullient, bold businessman who had fought his way tip from the poverty of a small-town parsonage, was a commission merchant of considerable prominence when Rockefeller met him. The two quickly took a liking to one another, and Rockefeller soon induced Flagler to join the fast-expanding business. Haglcr brought along his own funds and those of his father-in-law, Stephen Harkncss, and this fresh indnx of capital made possible even further expansion. Rockefeller, Andrews & Flagler—soon incorporated as the Standard Oil Company—rapidly became the biggest single refinary in Cleveland.

Flagler brought to the enterprise an immense energy and a playfulness that Rockefeller so egregiously lacked. The two main partners now had a code word in their telegrams—AMELIA—which meant “Everything is lovely and the goose hangs high.” And everything was lovely. One of Flagler’s first jobs was to turn his considerable bargaining skills to a crucial link in the chain of oil-processing costs. All the major refineries bought in the same market—the Oil Regions—and all sold in the same markets—the great cities—so that their costs of purchase and their prices at the point of sale were much alike. In between purchase and sale, however, lay two steps: the costs of relining and the costs of transportation. In the end it was the latter that was to prove decisive in the dog-eat-dog struggle among the refineries.

For the railroads needed a steady flow of shipments to make money, and they were willing to grant rebates to the refiners if they would level out their orders. Since there were a number of routes by which to ship oil, each refiner was in a position to play one road against another, and the Standard, as the biggest and strongest refiner in Cleveland, was naturally able to gain the biggest and most lucrative discounts on its freight. This was a game that Flagler played with consummate skill. Advantageous rebates soon became an important means by which the Standard pushed ahead of its competitors—and in later years, when there were no more competitors, an important source of revenue in themselves. By 1879, when the Rockefeller concern had become a giant, a government investigatory agency estimated that in a period of five months the firm had shipped some eighteen million barrels of oil, on which rebates ran from eleven per cent on the B&O to forty-seven per cent on the Pennsylvania Railroad. For the five months, rebates totalled over ten million dollars.

This is looking too far ahead, however. By 1869, a scant three years after Flagler had joined it, the company was worth about a million dollars, but it was very far from being an industrial giant or a monopoly. Indeed, the problem which constantly plagued Rockefeller and his associates was the extreme competition in the oil business. As soon as business took a downturn—as it did in 1871—the worst kind of cutthroat competition broke out: prices dropped until the Titusville Herald estimated that the average refiner lost seventy-five cents on each barrel he sold.