Today I want to briefly write about Rockefeller and Standard Oil. Most of what I write here can be found in the documentary Men who built America. It can also be found in some texts written by Jesús Fernández-Villaverde, although they are not yet published, so I cannot, unfortunately, provide the reference. The summary of the story is that Rockefeller was a very clever guy from Cleveland, Ohio, who built Standard Oil, one company that dominated the petroleum industry in the USA towards the end of the 1800s.
Its relevance in history is twofold. In itself, the story is not very interesting, yet it shows how natural monopolies can arise, and it also shows how regulating them is a tricky business, providing a lesson for modern businessmen and regulators alike.
Towards 1860, at the early age of 20, Rockefeller, realizing the high profits of vertical integration of refining and distributing oil, rather than on oil exploration in itself, carefully analyzed places to minimize costs of distributing and refining it. Its success was unrivaled. Just to get a glimpse of how rich he became, according to Wikipedia, he managed to gain a net worth equivalent to modern 23.6 billion US dollars. Yet, “using the inflation model, in adjusted dollars for late 2017, his net worth would be US$350 billion”. Also “On September 29, 1916, Rockefeller became the first person ever to reach a nominal personal fortune of US$1 billion (equivalent to US$16 billion in 2019)”1.
So why do we care? Right after its success, the Sherman Antitrust Act of 1890 emerged, which was the preamble for the 1906 antitrust case against Standard Oil that after a series of procedures, lead to the final decision of 1911 by the Supreme Court of the US to effectively divide the assets and businesses of Standard Oil Co. of New Jersey into 34 new companies, in order to neutralize the force of the unlawful power.
We fast forward to the movie, and what happened in the following decades is that the companies merged again into huge titans that would now dominate the market. Is it possible that we will see a new antitrust act in the USA anytime soon? Probably not. It is not impossible, but the conditions have changed a bit, with large international markets and big players. Yet, such problems with natural monopolies still exist and will be part of the market economies whenever there are increasing returns to scale.
Lastly, I share a picture of a nice park I recently went to in West Virginia:
