Alliances and Counteralliances

7.3 Alliances and counter alliances

To Mr. Rockefeller a day is a year, and a year as a day. He can wait, but he never gives up.

End 1872, 80% of the American refiners, unite under the presidency of Rockefeller in the National Refiners Association. As soon as the producers learned it, anxious to see an oligopsone for their good formed, make a counter alliance and unite in the Petroleum Producer's Agency. We have to consider the producers psychology : scattered over vast territories, they had little interest for things outside their own wells, and would unite only under extreme circumstances. Having lived through the euphoric conditions of the first years, they excepted a return on invested capital of no less than 50 %, and if they did not earned their total investment in three years, they felt sorry.

But only oil at $5 a barrel could grant them such profits. And to have such a price, the only way was to unite to restrict production. Note that this is the first time in history that oil producers unite to restrict production, 100 years before OPEC !

<< It is a large order . . . that always breaks a pool. The manufacturer will figure that he can pay his fine to the pool, take a big order, and with the profit on this be in a stronger position than any of his competitors who may then try to break the pool. Suppose there is a ten-per-cent profit in his business, and he can get a $2,000,000 order by cutting to five-per-cent profit. He does not regard it as dishonorable, if it is a 'fine' pool to pay the $5,ooo fine, and then say to his competitors: 'I have paid my fine. >>

The journalist Barron citing a jurist

Rockefeller thus had to deal with the new producer's association which asked him $ 5 a barrel. Instead of refusing, John D. Rockefeller smartly pledged himself to buy oil at this price as long as the producers effectively restricted their production. He thus showed his "good will and willingness to ally with them for the good of the industry". This unhoped-for collaboration of the Standard calmed the producer's anger and soon they stopped their protest.

But did Rockefeller abandon his dreams of conquest ... ? Only a few months afterwards, the Standard Oil announced that it would no more buy oil from the Petroleum Producer's Agency. You have not restricted production sufficiently, how can you expect that we continue to pay your price ? This reaction caught the producers by surprise and they did not react efficiently. Many were deep in debt and absolutely had to sell oil to avoid bankruptcy. A lasting freezing of production was thus impossible, and the Standard again dictated his terms. Dissentions soon consumed the alliance and after only 10 months, the producers association disappeared.