Despite the substantial drop in oil prices,
Standard Oil was able to increase its profits by reducing costs from about 3 cents per
gallon in 1870 to less than 0.5 cents in 1885.
Silence is Golden
Hide the profit and shut up !
To avoid stimulating the greed of their competitors
the men of the Standard, like those who worked with Michael Milken in the 1980's had to
commit themselves not the reveal what they earned and to keep a low profile in their
standing expenses. The huge profits were mainly reinvested in capital goods. In 1886 net
profits were worth $15 mil a year. Rockefeller's strict Baptist faith made him despise
personal luxury and drove him to reinvest it all. If we add to this wonderful trait his
compulsive tendency for secret, we can understand that its as much by calculation as
by taste that the Standard was so discreet.
To work for the Standard Oil, the railroads had to
commit themselves to give detailed reports to the Standard on all the oil transport made
for competitors, stating the producer's name, quantity, quality and price paid by the
client. Rockefeller also places spies who checked that the railroads really used the price
discrimination explained above. If this discrimination had not
been applied in a case known to the Standard, the culprit railroad quickly received a
letter like this:
|<<Wilkerson and Company received
car of oil Monday 13th-70 barrels which we suspect slipped through at the usual fifth
class rate paying only $41.50 freight from here. Charges 55.40. Please turn another screw.
Economies of scale
A new distillation method discovered in 1875 rose
the minimum size of the efficient refinery to a daily capacity of 1000 barrels.
Rockefeller soon decided to concentrate most of his refining in three giant refineries
conveniently located, like in Bayonne, so as to maximize scales economies. Furthermore,
Standard's refineries had a very efficient use of by products
|Here is the contract that the refiners who
wanted to collaborate with the Standard (or its predecessor the SIC) had to sign :
I, -- -, do solemnly promise upon my honor and faith as a
gentleman that I will keep secret all transactions which 1 may have with the corporation
known as the South lmprovement Company; that should I fail to complete any bargains with
the said company, all the preliminary conversations shall be kept strictly private; and
finally that I will not disclose the price for which I dispose of any products or any
other facts which may in any way bring to light the internal workings or organization of
the company. All this I do freely promise.
Les petits ruisseaux font les grandes
In an industry producing such
important quantities, there was no such thing as as small saving. If cent spared on
production costs, each dollar of waste reused, each percent of discount extorted to a
supplier was multiplied by millions and transformed in important profits. By making its
own barrels, glue, hoods, pipelines, food for horses, etc... John D. Rockefeller
enlarged each time his profit margin. The costs of barrels dropped of $1.25 each, sparing
$4'000'000 a year, price of metal boxes was lowered of 15 cents, sparing $5'000'000 a
year. What some condemned as meanness from Rockefeller and other industrial captains can
rather be seen as large scale vision of the crucial importance of the crucial importance
of a perfect management of the production process.