The Standard Oil Story?
I didn't realize that the more popular texts didn't cover the details of Standard Oil's genesis. That piqued my curiosity, given my interest in oil and energy-related topics. Almost all commentary seemed to focus on railroad deals or other minutiae instead of what my background suggests should have been the key: returns to scale and capital efficiency.
Thankfully, my research assistant, GPT-5, found some excerpts of the excellent book "John D. Rockefeller: The Cleveland Years" by Grace Goulder, which I bought and read. Goulder is an interesting character, having written about local Ohio history most of her life. After her husband died, she took on the project of organizing the Western Reserve Historical Society's files on Rockefeller (he had been a vice president of the society for "decades"). The book was the result. Goulder's tone is much more neutral and friendly than many on the subject.
The book provides enough details to piece together how the early Standard Oil business model worked. The reality seems different than many popular accounts and is much more logically consistent.
The Backdrop
Colonel Drake and his outfit discovered "rock" oil in Western Pennsylvania in 1859. The find brought great excitement and speculation since oils and fats were in chronically short supply. Fancier towns might have gas street lights. Rich folk would use whale oil, but most people went without, had dirtier burning oil, or used candles.
Cleveland was one of the closest transportation hubs to the Titusville find. Some refining of substances like coal or lard to produce lamp oil or other products was already happening in Cleveland in 1859, mostly by British immigrants (one named Andrews became Standard Oil's lead technical mind). Several of these men were the first to distill kerosene from a Titusville sample. Small refineries sprang up in Cleveland, and in 1863, the business picked up after an already planned railroad connected the oil fields to the city and the city to coastal markets.
It is difficult to emphasize how nascent the industry was. Refining methods were so inefficient in the mid-1860s that a barrel of oil (42 gallons) sold for almost the same price as a gallon of refined kerosene. Today, the price ratio of refined products to crude oil is ~1.25x instead of 42x.
These factors set the stage for Cleveland to be a refining (and technology) boomtown.
Rockefeller's Entry
Rockefeller's business career started in 1855 at the age of 16 as a clerk/bookkeeper for a local trading house. His responsibilities and pay expanded quickly. Two years later, he used his savings and a loan from his father to start his own trading firm with a partner named Clark, specializing in items like meat and grain. Business was good, especially with the stimulus of wartime orders. Rockefeller was already fairly rich by the time he became interested in oil in 1863.
Rockefeller's first experience with oil was handling its shipment through his trading company. Andrews, one of the chemists who had first distilled kerosene from the oil, constantly badgered Rockefeller and Clark about his ideas for producing refined products. Eventually, Rockefeller and Clark decided there was a business opportunity, and they all started a refinery in 1863.
The Human Capital Interlude
A continuous theme throughout the book is "game recognize game" moments. Why was Rockefeller able to get a loan at the most prestigious bank for his trading house when he was barely 20? Why was the best chemist, Andrews, pursuing Rockefeller instead of other businessmen? And on and on later in his career.
Cleveland was a small city compared to today. John D had a reputation as a hard worker, an excellent manager who minded every penny, and as a devout Christian who was an effective leader in his church. All of his connections knew John from business, church, or membership in other organizations (like the YMCA). He and the best people gravitated towards each other and were happy to do business together.
Outgrowing the First Partnership
Rockefeller, Clark, Clark's brothers, and Andrews quickly had the refinery humming along. Andrews kept improving the process to increase the yield and quality of kerosene (the most valuable component; one barrel yielded roughly half a barrel of kerosene after the improvements). Rockefeller led a program to reduce costs elsewhere by finding markets for non-kerosene byproducts, utilizing waste streams, bringing on a full-time plumber, buying an oak forest (for barrels), and buying a barrel-making shop.
Rockefeller wanted to continue to grow, borrowing heavily to do so. Clark's brothers did not share his enthusiasm, and the partnership became fraught. John and Andrews agreed that they would stay partners in a new venture if this one failed, and after a tense meeting, everyone agreed the partnership should be dissolved (though the Clarks were under the assumption that Andrews would follow them). The business went to auction in early 1865, with Rockefeller winning the bid over Clark.
Rockefeller and Andrews' refinery, known as Excelsior Works, was considered the best refinery (out of 30 or so in the city), even with more competitors joining every day.
Refining is a Scale Business
Scale is helpful for most businesses, but refining might be one of the most extreme examples. A typical rule of thumb in chemical engineering is that capital costs increase sublinearly with capacity, usually by (capacity ratio)^0.6. A plant with double the output is only 50% more expensive to build, and operating costs tend to follow similar trends. The reason behind this is that chemical plants and refineries are agglomerations of steel vessels and pipes. Vessel and pipe volume increases faster than surface area as size increases, decreasing steel and fabrication costs per unit of volume. Many items, like controls or operators, cost the same for a large component as they do for a small one.
Rapidly expanding refining capacity means crashing costs. The biggest, most efficient refineries had enormous advantages over smaller, less sophisticated ones, and competitors would quickly swamp anyone sitting still. Standard Oil and its predecessor firms increased production ~20x between 1865 and the end of 1872, meaning their costs could have fallen more than 85%. At that point, they were the largest refiner in the world with a double-digit share of capacity, and it was their game to lose. If we understand this short period, then we know how the company eventually won.
Standard Oil Refinery One, 10% of US refining capacity in 1870
Standard Oil Refinery One, 1889
Standard Oil and the Great Buyout
In the late 1860s, Rockefeller realized that he needed more capital (human and financial) to grow and stay ahead of his competitors. He had recently brought in his brother, William, to help. Next, he brought in a man named Flagler who had relocated to Cleveland. John D. knew him from his previous trading business. Flagler had some cash, but he was also related to the wealthy Harkness family. Harkness invested ~$80,000 in the refinery partnership, which was capital-constrained after maxing out its bank lending. That capital unlocked the next stage of growth.
In 1870, these partners (J.D. Rockefeller, W. Rockefeller, Flagler, Andrews, Harkness) upgraded their partnership to a joint stock operation with 10,000 shares at $100/share. The five owned 90% of the stock, with W. Rockefeller's brother-in-law taking 10%. The book makes the point that the company was worth significantly more than $1 million. The goal was to create a financial structure that was more robust and flexible than cash-based partnerships. By 1870, Standard Oil controlled roughly 10% of the oil trade in the US.
Most refiners were hurting in the early 1870s due to increasing competition and falling margins. It became apparent that the situation required consolidation to increase scale and reduce overhead. Rockefeller formed a plan to merge other refining operations with Standard Oil. Most payments would be in stock to preserve capital needed for growth and consolidation. Sellers would join the winning team in a winner-take-all market.
Rockefeller naturally started with his most capable competitor in Cleveland, a man named Payne, to make any alternative unviable for the remaining dozens of local refineries. Standard Oil gave Payne 4000 shares, and Payne would go on to become a long-serving executive within the company. Most of the other refineries joined, usually for a fraction of the stock, with the compensation based on value. All but six of these refineries were scrapped due to their inferior scale and equipment. But, the businesses still had value in people, transportation assets, or intellectual property. After the buyouts, the new team quickly set to work rationalizing the employees and facilities, pushing another leap in capacity and market share.
Many popular accounts conclude that these buyouts were to eliminate competitors with strong-arm tactics. The book counters that a few refinery owners took cash instead of stock. Standard Oil's appreciation made fools of them, and they became loud critics. They were great examples for later writers to use to decry the process.
A more rational view is that this cluster of refiners represented a massive portion of the global refining expertise and intellectual property portfolio. Together, they could further increase scale, efficiency, and the chance of winning. It was a master stroke for Standard Oil to pull off the move. And anyone who held onto the stock became wildly rich.
Refining Margins and Transportation
The census added refining data in the 1870s. As a result, we have some records of the spread between crude oil and refined products for various years.
The book references early spreads being as large as $0.40 per gallon in the early 1860s.
The census (pg 22) shows that gross refining margins were ~$0.08/gallon in 1872, during the time of the Cleveland consolidation.
Then, the same shows margins had collapsed by 1880 to something approaching modern spreads.
Much is made of Standard Oil's transportation advantages. Standard did negotiate a rate decrease of $0.75/barrel, or $0.02 per gallon, with the railroad shortly before the consolidation. The company had been shipping by boat during the summer, and instead offered to ship oil year-round by rail for the discount. That would be very valuable to a railroad with high fixed costs, and the increased shipments meant dedicated trains could drastically shorten the time to market by avoiding stops to pick up other cargo. Smaller refineries didn't earn as much discount because their small shipments wouldn't have these cost-saving advantages for the railroad.
Another point is that $0.02/gallon was small compared to gross refining margins. Increasing scale and improving technology to lower costs had a 16x larger impact than shipping savings between 1863 and 1872.
Finally, there was the scandal around rebates and the South Improvement Company. The book claims that Rockefeller had no part in the initial negotiations, though Flagler may have. The deal leaked and fell apart before shipping a single barrel.
We can safely conclude that the transportation angle was a sideshow compared to scale and efficiency improvements in Standard Oil's fortune, but the transportation issues made a great public relations tool against Standard Oil, especially since railroads were already hated.
Long-Term Strategy and World-Scale Growth
Standard Oil's stock appreciated rapidly following the rollup. That allowed it to pull the same trick on a national scale, bringing in most of the large refiners in Pennsylvania, New York, and New England. Each purchase increased the company's value. The original partners still owned almost 60% of the stock in 1880.
The company ran into the issue of owning extremely valuable assets in multiple states when the original company, Standard Oil of Ohio, was only licensed to operate in Ohio. They were one of the first to use a "trust" to unify ownership of many state subsidiaries.
In some sense, the story becomes boring at this point. The push for scale was relentless as demand zoomed up. The company began exporting fuel to Europe and Asia. Pipelines replaced railroads due to their lower costs. Refineries became even larger and more concentrated. New technology to process high-sulfur crude unlocked a new supply of oil.
A funny story is that Andrews, the original chemist, was angry that Standard Oil was not paying many dividends and instead plowing all the earnings back into the business as capital investment. Rockefeller asked him to name his price to get bought out. Andrews threw out $1 million, Rockefeller paid him the next day, and like the others, he became bitter when the stock continued to appreciate.
By the turn of the century (pg 3), the refinery industry's cost structure had matured into what we'd recognize today.
The Intellectual Property Interlude
Rockefeller and Standard Oil were also heavy buyers of intellectual property. The book mentions the company paying stock for a formulation that prevented barrels from leaking, developed by the first cooper (with the help of a beggar). Another example was buying a patent to process paraffin from a man named Frasch. Frasch later worked for Standard Oil and helped develop the process that could remove sulfur from crude oil. Another chemist who helped with the sulfur process also developed early "cracking" processes to increase the yield of gasoline.
Better technology was an advantage for Rockefeller's firms from the start in 1863 until the government broke up Standard Oil.
Conclusion
In the end, the early story of Standard Oil isn't that different than many of today's tech titans. There were angel investors, acqui-hires, IP purchases, disruptive technology, and skyrocketing demand. The company with the most talent, best technology, and most efficient distribution ran the table.
And like some of today's companies, the monopoly claim seems somewhat weak. Standard Oil could only continue winning by reinvesting capital to grow scale and improve its technology. Some independent US refiners remained. The company operated in a global market and faced more competition than the US refining market share would suggest.
Rockefeller himself was a visionary in creating large, technical businesses. He understood the need to accumulate different types of capital under one umbrella. Innovative legal structures allowed him to achieve this aim.
All in all, the story is much more interesting than many popular narratives. The book is well worth reading if you'd like more detail.
How Rockefeller and His Partners Built Standard Oil
2025 October 5 Twitter Substack See all postsMany tech industry followers will recognize the playbook.
The Standard Oil Story?
I didn't realize that the more popular texts didn't cover the details of Standard Oil's genesis. That piqued my curiosity, given my interest in oil and energy-related topics. Almost all commentary seemed to focus on railroad deals or other minutiae instead of what my background suggests should have been the key: returns to scale and capital efficiency.
Thankfully, my research assistant, GPT-5, found some excerpts of the excellent book "John D. Rockefeller: The Cleveland Years" by Grace Goulder, which I bought and read. Goulder is an interesting character, having written about local Ohio history most of her life. After her husband died, she took on the project of organizing the Western Reserve Historical Society's files on Rockefeller (he had been a vice president of the society for "decades"). The book was the result. Goulder's tone is much more neutral and friendly than many on the subject.
The book provides enough details to piece together how the early Standard Oil business model worked. The reality seems different than many popular accounts and is much more logically consistent.
The Backdrop
Colonel Drake and his outfit discovered "rock" oil in Western Pennsylvania in 1859. The find brought great excitement and speculation since oils and fats were in chronically short supply. Fancier towns might have gas street lights. Rich folk would use whale oil, but most people went without, had dirtier burning oil, or used candles.
Cleveland was one of the closest transportation hubs to the Titusville find. Some refining of substances like coal or lard to produce lamp oil or other products was already happening in Cleveland in 1859, mostly by British immigrants (one named Andrews became Standard Oil's lead technical mind). Several of these men were the first to distill kerosene from a Titusville sample. Small refineries sprang up in Cleveland, and in 1863, the business picked up after an already planned railroad connected the oil fields to the city and the city to coastal markets.
It is difficult to emphasize how nascent the industry was. Refining methods were so inefficient in the mid-1860s that a barrel of oil (42 gallons) sold for almost the same price as a gallon of refined kerosene. Today, the price ratio of refined products to crude oil is ~1.25x instead of 42x.
These factors set the stage for Cleveland to be a refining (and technology) boomtown.
Rockefeller's Entry
Rockefeller's business career started in 1855 at the age of 16 as a clerk/bookkeeper for a local trading house. His responsibilities and pay expanded quickly. Two years later, he used his savings and a loan from his father to start his own trading firm with a partner named Clark, specializing in items like meat and grain. Business was good, especially with the stimulus of wartime orders. Rockefeller was already fairly rich by the time he became interested in oil in 1863.
Rockefeller's first experience with oil was handling its shipment through his trading company. Andrews, one of the chemists who had first distilled kerosene from the oil, constantly badgered Rockefeller and Clark about his ideas for producing refined products. Eventually, Rockefeller and Clark decided there was a business opportunity, and they all started a refinery in 1863.
The Human Capital Interlude
A continuous theme throughout the book is "game recognize game" moments. Why was Rockefeller able to get a loan at the most prestigious bank for his trading house when he was barely 20? Why was the best chemist, Andrews, pursuing Rockefeller instead of other businessmen? And on and on later in his career.
Cleveland was a small city compared to today. John D had a reputation as a hard worker, an excellent manager who minded every penny, and as a devout Christian who was an effective leader in his church. All of his connections knew John from business, church, or membership in other organizations (like the YMCA). He and the best people gravitated towards each other and were happy to do business together.
Outgrowing the First Partnership
Rockefeller, Clark, Clark's brothers, and Andrews quickly had the refinery humming along. Andrews kept improving the process to increase the yield and quality of kerosene (the most valuable component; one barrel yielded roughly half a barrel of kerosene after the improvements). Rockefeller led a program to reduce costs elsewhere by finding markets for non-kerosene byproducts, utilizing waste streams, bringing on a full-time plumber, buying an oak forest (for barrels), and buying a barrel-making shop.
Rockefeller wanted to continue to grow, borrowing heavily to do so. Clark's brothers did not share his enthusiasm, and the partnership became fraught. John and Andrews agreed that they would stay partners in a new venture if this one failed, and after a tense meeting, everyone agreed the partnership should be dissolved (though the Clarks were under the assumption that Andrews would follow them). The business went to auction in early 1865, with Rockefeller winning the bid over Clark.
Rockefeller and Andrews' refinery, known as Excelsior Works, was considered the best refinery (out of 30 or so in the city), even with more competitors joining every day.
Refining is a Scale Business
Scale is helpful for most businesses, but refining might be one of the most extreme examples. A typical rule of thumb in chemical engineering is that capital costs increase sublinearly with capacity, usually by (capacity ratio)^0.6. A plant with double the output is only 50% more expensive to build, and operating costs tend to follow similar trends. The reason behind this is that chemical plants and refineries are agglomerations of steel vessels and pipes. Vessel and pipe volume increases faster than surface area as size increases, decreasing steel and fabrication costs per unit of volume. Many items, like controls or operators, cost the same for a large component as they do for a small one.
Rapidly expanding refining capacity means crashing costs. The biggest, most efficient refineries had enormous advantages over smaller, less sophisticated ones, and competitors would quickly swamp anyone sitting still. Standard Oil and its predecessor firms increased production ~20x between 1865 and the end of 1872, meaning their costs could have fallen more than 85%. At that point, they were the largest refiner in the world with a double-digit share of capacity, and it was their game to lose. If we understand this short period, then we know how the company eventually won.
Standard Oil Refinery One, 10% of US refining capacity in 1870
Standard Oil Refinery One, 1889
Standard Oil and the Great Buyout
In the late 1860s, Rockefeller realized that he needed more capital (human and financial) to grow and stay ahead of his competitors. He had recently brought in his brother, William, to help. Next, he brought in a man named Flagler who had relocated to Cleveland. John D. knew him from his previous trading business. Flagler had some cash, but he was also related to the wealthy Harkness family. Harkness invested ~$80,000 in the refinery partnership, which was capital-constrained after maxing out its bank lending. That capital unlocked the next stage of growth.
In 1870, these partners (J.D. Rockefeller, W. Rockefeller, Flagler, Andrews, Harkness) upgraded their partnership to a joint stock operation with 10,000 shares at $100/share. The five owned 90% of the stock, with W. Rockefeller's brother-in-law taking 10%. The book makes the point that the company was worth significantly more than $1 million. The goal was to create a financial structure that was more robust and flexible than cash-based partnerships. By 1870, Standard Oil controlled roughly 10% of the oil trade in the US.
Most refiners were hurting in the early 1870s due to increasing competition and falling margins. It became apparent that the situation required consolidation to increase scale and reduce overhead. Rockefeller formed a plan to merge other refining operations with Standard Oil. Most payments would be in stock to preserve capital needed for growth and consolidation. Sellers would join the winning team in a winner-take-all market.
Rockefeller naturally started with his most capable competitor in Cleveland, a man named Payne, to make any alternative unviable for the remaining dozens of local refineries. Standard Oil gave Payne 4000 shares, and Payne would go on to become a long-serving executive within the company. Most of the other refineries joined, usually for a fraction of the stock, with the compensation based on value. All but six of these refineries were scrapped due to their inferior scale and equipment. But, the businesses still had value in people, transportation assets, or intellectual property. After the buyouts, the new team quickly set to work rationalizing the employees and facilities, pushing another leap in capacity and market share.
Many popular accounts conclude that these buyouts were to eliminate competitors with strong-arm tactics. The book counters that a few refinery owners took cash instead of stock. Standard Oil's appreciation made fools of them, and they became loud critics. They were great examples for later writers to use to decry the process.
A more rational view is that this cluster of refiners represented a massive portion of the global refining expertise and intellectual property portfolio. Together, they could further increase scale, efficiency, and the chance of winning. It was a master stroke for Standard Oil to pull off the move. And anyone who held onto the stock became wildly rich.
Refining Margins and Transportation
The census added refining data in the 1870s. As a result, we have some records of the spread between crude oil and refined products for various years.
The book references early spreads being as large as $0.40 per gallon in the early 1860s.
The census (pg 22) shows that gross refining margins were ~$0.08/gallon in 1872, during the time of the Cleveland consolidation.
Then, the same shows margins had collapsed by 1880 to something approaching modern spreads.
Much is made of Standard Oil's transportation advantages. Standard did negotiate a rate decrease of $0.75/barrel, or $0.02 per gallon, with the railroad shortly before the consolidation. The company had been shipping by boat during the summer, and instead offered to ship oil year-round by rail for the discount. That would be very valuable to a railroad with high fixed costs, and the increased shipments meant dedicated trains could drastically shorten the time to market by avoiding stops to pick up other cargo. Smaller refineries didn't earn as much discount because their small shipments wouldn't have these cost-saving advantages for the railroad.
Another point is that $0.02/gallon was small compared to gross refining margins. Increasing scale and improving technology to lower costs had a 16x larger impact than shipping savings between 1863 and 1872.
Finally, there was the scandal around rebates and the South Improvement Company. The book claims that Rockefeller had no part in the initial negotiations, though Flagler may have. The deal leaked and fell apart before shipping a single barrel.
We can safely conclude that the transportation angle was a sideshow compared to scale and efficiency improvements in Standard Oil's fortune, but the transportation issues made a great public relations tool against Standard Oil, especially since railroads were already hated.
Long-Term Strategy and World-Scale Growth
Standard Oil's stock appreciated rapidly following the rollup. That allowed it to pull the same trick on a national scale, bringing in most of the large refiners in Pennsylvania, New York, and New England. Each purchase increased the company's value. The original partners still owned almost 60% of the stock in 1880.
The company ran into the issue of owning extremely valuable assets in multiple states when the original company, Standard Oil of Ohio, was only licensed to operate in Ohio. They were one of the first to use a "trust" to unify ownership of many state subsidiaries.
In some sense, the story becomes boring at this point. The push for scale was relentless as demand zoomed up. The company began exporting fuel to Europe and Asia. Pipelines replaced railroads due to their lower costs. Refineries became even larger and more concentrated. New technology to process high-sulfur crude unlocked a new supply of oil.
A funny story is that Andrews, the original chemist, was angry that Standard Oil was not paying many dividends and instead plowing all the earnings back into the business as capital investment. Rockefeller asked him to name his price to get bought out. Andrews threw out $1 million, Rockefeller paid him the next day, and like the others, he became bitter when the stock continued to appreciate.
By the turn of the century (pg 3), the refinery industry's cost structure had matured into what we'd recognize today.
The Intellectual Property Interlude
Rockefeller and Standard Oil were also heavy buyers of intellectual property. The book mentions the company paying stock for a formulation that prevented barrels from leaking, developed by the first cooper (with the help of a beggar). Another example was buying a patent to process paraffin from a man named Frasch. Frasch later worked for Standard Oil and helped develop the process that could remove sulfur from crude oil. Another chemist who helped with the sulfur process also developed early "cracking" processes to increase the yield of gasoline.
Better technology was an advantage for Rockefeller's firms from the start in 1863 until the government broke up Standard Oil.
Conclusion
In the end, the early story of Standard Oil isn't that different than many of today's tech titans. There were angel investors, acqui-hires, IP purchases, disruptive technology, and skyrocketing demand. The company with the most talent, best technology, and most efficient distribution ran the table.
And like some of today's companies, the monopoly claim seems somewhat weak. Standard Oil could only continue winning by reinvesting capital to grow scale and improve its technology. Some independent US refiners remained. The company operated in a global market and faced more competition than the US refining market share would suggest.
Rockefeller himself was a visionary in creating large, technical businesses. He understood the need to accumulate different types of capital under one umbrella. Innovative legal structures allowed him to achieve this aim.
All in all, the story is much more interesting than many popular narratives. The book is well worth reading if you'd like more detail.