South Improvement Company

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The South Improvement Company was an amalgamation of crude oil processing companies with crude oil and oil products transporting railroad companies in North America in 1872 . The aim was to achieve a dominant position in the market . This should mainly be achieved by granting a discount on the transport service. When the oil producers were excluded from the cartel, they felt they had been taken advantage of and, in protest, stopped supplying oil to members of the South Improvement Company for 40 days . This refusal is known as the 1872 Oil War .

Map of Northwest Pennsylvania, USA

Situation before the South Improvement Company was founded

General situation

The Civil War ended in 1865 with the victory of the troops of the northern states. The reconstruction , the rebuilding and reorganization of the international community, lasted until 1877. As part of this new beginning, numerous railway lines were built: During the entire period, the movement of goods increased and the freight rates fell.

The Woodford and Phillips Well on the farm of James S. Tarr, 1861.

The oil region

In August 1859, Edwin L. Drake successfully drilled for oil for the first time near Titusville , Pa.. At that point, a barrel of crude oil was $ 20. Attracted by the great profit opportunities, countless winding towers were built in the following years in the area now known as “Oil Creek” (German oil brook). The crude oil processing industry , the refineries, had been established by 1865. The majority was then in the “Oil Creek” region. Because of the big profits in the new industry, refinery centers were formed far away from the oil region: New York, Cleveland, Pittsburgh, Philadelphia etc. These new centers had to cover the costs of crude oil, refining and transport of the oil products to pay the customer additional expenses for the delivery of the crude oil to the refineries. These distant centers were formed in places that had other advantages: New York had the short distance to the sales markets of the east of the USA, Cleveland the connection to the west and, for 8 months a year, inexpensive transport via the waterways of the Great Lakes. Overall, transport costs were the dominant expenses for ongoing production in the early years.

The high profits from oil refining led to a short-term amortization of the investments, but also to an accelerated expansion of capacities and the like. a. by new entrants. As a result of technological progress, the effectiveness of the refining process has been increased both in terms of the amount of product produced per amount of crude oil used and in terms of process costs. As a result of this development, the size of an optimal refinery in terms of costs increased by more than an order of magnitude . This made old systems uneconomical within a few years. Overall, there was a large oversupply of refinery capacity at the turn of the year 1871/1872. At times the capacity for 3 barrels was available for each barrel of oil products produced.

Between 1869 and 1871, the amount of oil refined in Cleveland more than doubled, from 776,356 barrels to 1,640,499 barrels. As early as 1869, Cleveland had risen to become the largest refinery center, past New York and above all Pittsburgh. Of the 10 to 12,000 barrels produced there daily, Standard Oil had the largest share at 1,500.

In addition to business people in Cleveland, those in Pittsburgh and Philadelphia were also concerned about the increasing capacities of the refineries in the oil region: in 1870, almost 10,000 barrels of oil products were produced in the oil region every day, almost as much as in Cleveland.

Railway wagons with wooden crude oil tanks (Densmore wagons).
Port facility in Oil City, Pa., The transfer point for crude oil from the Oil Region .

The transport

Due to the expected large volumes of freight in a new industry, several railway companies expanded their rail network between 1860 and 1870 in the direction of the oil region (see map). The rail transport capacities made available by the expansion far exceeded the required transport performance.

The railroad companies had a self-interest in preventing added value in the oil region by building up additional refinery capacities: They earned twice at the refineries in Cleveland, Pittsburgh, Philadelphia and New York, first by transporting the crude oil, then by the Transportation of refined products.

The construction of a railway line ties up very large financial resources, the use of which only pays off over years or even decades. The freight rates are determined in such a way that, in addition to the operating costs for the journey, the infrastructure costs are also proportionally taken into account. Discounts on the freight rates were z. B. for the use of own wagons (tanker in the case of Standard Oil) or the assembly of entire trains. For the current company result, however, it can also make sense for the railway line to only use these additional costs, i.e. H. Calculating the variable costs without the infrastructure costs: The company then still has a greater profit from this additional transport than without it. The same reasoning can be applied to an additional move. Due to the high investment costs and thus the high proportion of infrastructure costs in the freight rates, the discounts that can be achieved using the “additional freight” approach are very high, sometimes more than 50 percent. The poor financial situation of the railway companies often forced them to give appropriate discounts to avoid bankruptcy. It is also this tense financial situation in the railway sector that has repeatedly led to consolidations, pool agreements and calls for regulation and financial support from the government. Because of this proximity to regulation and support, the railways were seen as a means of transport for the general public (English: common carrier ), which did not have the "moral right" to differentiate between the various clients in their prices and freight rates. However, this “duty” of equal treatment was not cast in binding legal texts and the railway companies generally made extensive use of so-called draw backs , repayments on freight rates paid. The basis for these payments was not only the amount of freight carried, but also corporate policy considerations: For example, the transport of crude oil from the oil region was partially subsidized, but the transport of refined products to the sales markets was not. Systematic information about the transport services used by competing companies was also part of the discount system.

The laying of a pipeline from the oil region to the refineries was technologically not yet possible in the early years. The first pipelines (1865) were made of wood, had a low production capacity and could only bridge short distances. In 1878 the construction of a crude oil pipeline leading out of the oil region began.

The shipping of crude oil to the refineries was carried out in the oil region e.g. Sometimes carried out with flat barges. The creek through the region was not navigable even for the flat paddle steamers. Rather, the creek itself had to be dammed regularly for the barges. The Great Lakes were z. B. used by the refineries in Cleveland for the transport of oil products. The freight rates to be paid were usually 50 percent of the railway rates.

Concentration of refineries in Cleveland

In 1870 Standard Oil's share of the refined products market was four percent. Due to the overproduction of crude oil and an oversupply of transport and refining services, the market for oil products was saturated and prices fell.

At the same time, ever larger quantities of crude oil were being transported abroad: within 12 years of its discovery, crude oil and oil products became the United States' fourth most important export. The foreign markets increasingly demanded crude oil in order to build up refineries in their own country. France even introduced an extra tax on American refined products.

At that time, and just one day before the inaugural meeting of the South Improvement Company , the Standard Oil Company of Cleveland increased its share capital from $ 1 million to $ 2.5 million in a unanimous resolution. In addition to the original five shareholders (John D. Rockefeller, Henry M. Flagler, Samuel Andrews, Stephen V. Harkness and William Rockefeller), five more were added: The lawyers OB Jennings and Benjamin Brewster and the railroad partners Truman P. Handy, Amasa Stone and Stillman Witt.

John D. Rockefeller, armed with the necessary financial resources and at least a clear idea of ​​what the South Improvement Company should one day achieve, is said to have negotiated with every one of the refinery owners competing with him in Cleveland about the takeover of his refinery. His aim was not primarily to buy up the companies, but to integrate them into Standard Oil: The refinery owners were offered a stake in Standard Oil instead of money for the time value of their systems. Much of the criticism of Rockefeller's approach was sparked by the determination of the fair value, which, as explained at the beginning, was definitely lower than the investment and maintenance costs due to the market situation at this point in time. Not all operations were continued by Standard Oil, but some were torn down and many were modernized. During this time, 21 of the 26 refineries became Standard Oil, and Standard Oil's refining capacity rose to 10,000 barrels per day within 3 months.

Goals of the South Improvement Company

In this tense situation on the oil market (oversupply of crude oil, transport capacity, refinery capacity and refined products, as well as the increasing export of crude oil), refinery owners from Pennsylvania came up with the idea of ​​colluding with other refinery owners and the oil-transporting railroad companies in order to obtain discounts on the in Negotiating used transport services and receiving drawbacks , repayments for the transport services of non-members. If such a secret system could be enforced, a non-federal refinery would not be profitable. In other words, the market for refined products would be monopolized, the speculative nature of the oil business would be eliminated. In addition to this main agreement, the parties involved should also decide to adjust the refinery capacity to market demand. Furthermore, the railway companies should be persuaded not to transport crude oil for export. In his testimony to the House of Representatives Committee of Inquiry in 1888, Henry M. Flagler emphasized that neither he nor John D. Rockefeller nor anyone else from the Standard Oil Company believed in the South Improvement Company system . Only when Peter H. Watson from Lake Shore and Michigan Southern Railroad and numerous participants from Philadelphia and Pittsburgh were convinced of the company did they sign for shares, but never pay for them.

Founding of the South Improvement Company

The preliminary talks for the establishment of a secret society began in the fall of 1871. The name South Improvement Company does not allow any conclusions to be drawn about the company's objective. H. a company name with a corresponding entry in the register that could be acquired quickly and without fuss in the event of liquidation . As early as January 2, 1872, the shareholders met in Philadelphia for their constituent meeting. In their honor as gentlemen , all had promised to keep the agreements confidential.

After much discussion, pressure from the railroad companies decided that any refinery owner could become a member of the South Improvement Company . The railroad companies had no interest in excluding a current refinery owner from the oil market, but new refinery owners should be denied market access.

A total of 2,000 shares of $ 100 each in the South Improvement Company were split:

Shareholders

Shareholder in the South Improvement Company
Surname city Country shares function Standard Oil Co. job
Bostwick, Jabez A. new York new York 180 yes, but only after the establishment of SIC JA Bostwick and Company.
Flagler, Henry M. Cleveland Ohio 180 Yes Founder of Standard Oil Co.
Frew, William Philadelphia Pennsylvania 10 Lockhart and Frew; Warden, Frew, and Company.
Lockhart, Charles Pittsburgh Pennsylvania 10 Lockhart and Frew.
Logan, WP Philadelphia Pennsylvania 10
Logan, John P. Philadelphia Pennsylvania 10
Payne, Oliver H. Cleveland Ohio 180 yes, but only after the establishment of SIC
Rockefeller, William Cleveland Ohio 180 Yes Founder of Standard Oil Co.
Rockefeller, John D. Cleveland Ohio 180 Yes Founder of Standard Oil Co.
Warden, William G. Philadelphia Pennsylvania 475 secretary Warden, Frew, and Company.
Waring, OF Pittsburgh Pennsylvania 475
Waring, Richard S. Pittsburgh Pennsylvania 10
Watson, Peter H. Ashtabula Ohio 100 president Lake Shore and Michigan Southern Railroad Freight Agent

It should be noted that the members of the South Improvement Company combined represented only about ten percent of the United States' refining capacity.

The South Improvement Company signed contracts with three railroad companies in January 1872:

The contracts set freight rates and discounts from all crude oil loading points (English. Common points ) in the refining centers of New York, Philadelphia, Baltimore, Pittsburgh and Cleveland. The published freight rate for a barrel from the oil region to New York was $ 2.56, on which the South Improvement Company received a discount of $ 1.06. It wasn't a discount in the strict sense of the word, because the South Improvement Company received $ 1.06 for each barrel of crude oil transported on this line, regardless of whether the client was a member or not. Corresponding payments had to be made to the South Improvement Company for all transports of crude oil and oil products by one of the three railway companies . Furthermore, the railroad companies undertook to send the complete waybills for transported oil to the South Improvement Company on a daily basis .

The railroad companies saw their advantage in the secured transport volume and thus the elimination of competition among themselves: Through the contracts, the freight of the South Improvement Company was divided between the railroad companies: The Pennsylvania Railroad was supposed to transport 45 percent, the other two companies each 27.5 percent.

Oil War of 1872

In mid-February, the first rumors arose in the oil region about a secret organization controlling freight rates. On February 19, 1872, the freight rates for a transport from the oil region to Buffalo were raised from 40 cents per barrel of crude oil to 65 cents without warning. Over the next few days, the rates for the other refining centers followed. When the morning newspapers in the oil region reported the increases in freight rates on February 26, and also stated that members of the South Improvement Company had been exempt from the increases, residents took to the streets. 24 hours later, 3,000 of them gathered at the Titusville Opera House. The Petroleum Producers' Union was founded in Oil City three days later and decided not to open up new sources for 60 days, to stop producing on Sundays and not to supply oil to members of the South Improvement Company , but rather to the refinery owners in the oil region to support. Furthermore, a group was sent to the House of Representatives to cancel the formation of the South Improvement Company .

The railroad companies were less affected by the Petroleum Producers' Union than the refinery owners. However, the railroad workers feared the Free Pipe-Line Bill , which demanded the same rights of way for pipeline construction as for the rail network: A pipeline network would interfere sensitively with rail freight traffic, and the Pennsylvania Railroad in particular had been successful in the past fought against the change in the law. On March 25, 1872, the railway companies agreed with the Petroleum Producers 'Union on new freight rates, the change of which had to be notified to the President of the Petroleum Producers' Union at least 90 days in advance.

Busting

On March 28, 1872, the three railway companies involved in the South Improvement Company withdrew their contracts. Almost simultaneously, the deprived Pennsylvania House of Representatives of the South Improvement Company its founding Charter and the legitimacy. The crude oil supply blockade against Standard Oil was only circumvented by individual oil brokers. 40 days after the start of the blockade, it was lifted. At the request of the Petroleum Producers Union , John D. Rockefeller replied on April 8, 1872 that Standard Oil no longer had any contracts with the railroad companies and that all contracts between the South Improvement Company and the railroad companies had been terminated.

The Congressional Committee on Commerce, in its final report on the South Improvement Company on May 7, 1872, ruled that it had been one of the largest and most dangerous conspiracies ever undertaken. Despite the break-up of the South Improvement Company , there was in the period afterwards a continuous mistrust between the individual branches of industry involved, and the founding enthusiasm for the oil industry had evaporated.

Mr. Flagler testified before the House of Representatives Committee of Inquiry in 1888 that, in his discretion, the South Improvement Company had never done a single dollar deal. It only existed as a formal shell, although the President of the South Improvement Company had concluded several contracts with railroad companies, which were, however, canceled or declared invalid after a few weeks by mutual agreement. In the time after the oil war of 1872, Standard Oil received information about sales and delivery quantities of its competitors in the same way as before: by systematically recording wagon and train movements of crude oil and oil product transports as well as through targeted inquiries with the business partners of the competitors.

literature

Doctrine of the past

  • Petroleum Producers' Union (Ed.): A History of the Rise and Fall of the South Improvement Company . Report of the Executive Committee of the Petroleum Producers' Union: Embracing the Reports of the Sub-committees on Transportation, Legislation, Investigation, and Treasurer's Report, Oil City, Pennsylvania. Wylie & Griest, 1872, p. 126 (very rare).
  • Ida Minerva Tarbell : The History of the Standard Oil Company . tape 1 . McClure, Phillips & Co., New York November 1904, pp. 406 ( (here online) [accessed July 15, 2012]).
  • Ida Minerva Tarbell: The History of the Standard Oil Company . tape 2 . McClure, Phillips & Co., New York November 1904, pp. 406 ( (here online) [accessed July 15, 2012]).

Reply

  • Dominick T. Armentano: Antitrust and Monopoly . Anatomy of a Policy Failure. 2nd Edition. The Independent Institute, Oakland 1990, ISBN 978-0-945999-62-1 , pp. 312 (first edition: John Wiley & Sons, Inc., 1982).

swell

  1. ^ A b Jesse M. Smith: Railways in the United States in 1902 . A forty-year review of changes in freight tariffs. Ed .: Interstate Commerce Commission, United States. tape 2 . United States Government Printing Office , Washington, DC 1903 ( (online here) [accessed July 18, 2012] The report does not record freight rates for oil and oil products until 1877. However, the freight rates for oil are not fundamentally different from those of other goods, so that the analogous conclusion appears admissible (see e.g. Kolko (1965))).
  2. ^ A b Ida Minerva Tarbell: The History of the Standard Oil Company . tape 2 . McClure, Phillips & Co., New York November 1904, pp. 409 ( (available online here) [accessed July 15, 2012]).
  3. ↑ a b c d e f g h i j k l m n o p q r s t u v w x y z aa ab ac ad ae af ag ah ai aj ak al am an ao ap aq ar as at au Ida Minerva Tarbell: The History of the Standard Oil Company . tape 1 . McClure, Phillips & Co., New York November 1904, pp. 406 ( (available online here) [accessed July 15, 2012]).
  4. ^ JT Henry: The Early and Later History of Petroleum . with Authentic Facts in Regard to its Development in Western Pennsylvania. Yes. B. Rodgers Co., Philadelphia 1873 ( (available online here) [accessed July 18, 2012]).
  5. ↑ a b c Jules Abels: The Rockefeller Billions . The Story of the World's Most Stupendous Fortune. MacMillan, 1965.
  6. ^ National Industrial Conference Board (ed.): The Petroleum Almanac . A statistical record of the petroleum industry in the United States and foreign countries. 1946, p. 420 .
  7. ↑ a b c d e f Dominick T. Armentano: Antitrust and Monopoly . Anatomy of a Policy Failure. 2nd Edition. The Independent Institute, Oakland 1990, ISBN 978-0-945999-62-1 , pp. 312 (First edition 1982, John Wiley & Sons, Inc.).
  8. ^ Gabriel Kolko: Railroads and Regulation . 1877-1916. Princeton University Press, Princeton, New Jersey 1965.
  9. ^ John S. McGee: Predatory Price Cutting . The Standard Oil (New Jersey) Case. In: Journal of Law and Economics . tape 1 , no. 1 . The University of Chicago Press, 1958, ISSN  0022-2186 , pp. 137-169 , JSTOR : 724888 .