Sunday, March 30, 2014

South Improvement Company: Start of a Monopoly

Thomas Scott (Left) and John Rockefeller (Right)
John D. Rockefeller was known as the man who monopolized the American oil industry for some decade. He dominated 90% of the North American oil trade. He beat down his competitors with predatory efficiency and ruthlessness. Rockefeller earned strong opposition and criticism. Finally, in 1911, his most cherished business, the Standard Oil, was found guilty of being a monopoly and break up into several companies, which some became powerful oil companies. The story of the creation of the monopoly of Standard Oil began in 1870’s as a collusion of interests and advantages under the name of South Improvement Company.

The South Improvement Company, formed in 1871, was a cartel made up of several railroad and oil refining company. Throughout the 1860’s the railroad industry was becoming saturated. The number of railroads outnumbered the demand for the service. The result, some railroad companies were starting to falter. In the oil refining industries, it was the same. The number of companies refining oil and making kerosene were becoming numerous. To gain advantage of the huge American market, some oil refining company resort to unprofitable pricing. This resulted into an unstable and dangerous pricing. With both having the interest of cornering their respective markets, a number of oil companies and railroad companies decided to form an alliance.

Many well-known personalities were engaged in the enterprise. The South improvement Company was mainly the idea of the Pennsylvania Railroad owner, Thomas Scott. It was then second by the partners of the oil company, Standard Oil, Henry Flagler and John D. Rockefeller. Rockefeller also made other 13 oil refineries from Pittsburgh, Cleveland, and New York to enter the enterprise to gain advantage of the market. Alongside Thomas, Scott, other prominent railroad companies joined in. The Erie Railroad New York Central under the “Commodore” Cornelius Vanderbilt.

Tom Scott was very eager for the plan to work. He used his connections and influence to bribe officials and judges in order to allow passage of such unfair company charter. Rockefeller stood on the idea that the collusion would result into a more stable and profitable venture. He thought that would be beneficial for the consumers and the industry if the price wars would end. But the final end of his plan was truly the complete integration of the oil companies under the leadership of his company, Standard Oil.

On January 18, 1872, the charter of the South Improvement Company was signed. The agreement was truly in favor of the oil companies. According to the agreement, Oil refiners would receive rebates from their freight rates. They would receive 40% to 50% rebates for freights containing crude oil and 25% to 50% for freights containing refined oil or kerosene. In addition, the oil company members would receive a share from the high freight rates paid by other non-member oil refineries.

For the railroad companies, they would share the amount of freight by the oil companies.  The Erie Railroad would receive 27.5% of the total amount of freight from the oil companies. 45% of the amount of the freights would be given to the Pennsylvania Railroad Company. Finally, the New York Central would had 27.5% of the remaining freights of oil.

The results of the collusion between oil and railroad companies could have hampered free and fair competition. Small independent oil players would have collapse due to the high freight rates and noncompetitive prices. In addition, other railroads companies could also be hampered because of the lack of freight loads from major oil refineries and independent oil companies.

Thankfully, soon after the signing of the charter, news and information about the collusion was leaked out through other oil companies, railroad companies, and the press. A wave of backlash hit the businessmen involved in the South Improvement Company. Protest were made against the South Improvement Companies. The press also made nasty commentaries against Scott, Rockefeller, and other involved. Effigies were burned. Names, such as “Anacondas”, “Monsters”, and Conspirators”, were given to the perpetrators. In the oil industry, the actions were concrete. Independent oil companies formed an alliance, the Petroleum Producer’s Union, to combat the South Improvement Company. The Union organized strikes such as refusal to sell crude oil to the oil refiners of the South improvement Companies and the stoppage of drilling for new oil wells. They also petitioned the state to revoke the charter of the company.

In March, many companies in the South improvement Companies began to leave the alliance. Vanderbilt and Scott abandoned the plan. Rockefeller offered a new scheme much palatable to other oil companies, the Pittsburgh Plan. However, it too was a failure.

By April 1972, just 4 months after the signing of the charter of the South Improvement Company by the Pennsylvania Legislature. Rockefeller, twice failed to integrate the whole American Industry, first the South Improvement Company, and second the Pittsburgh Plan. Eventually, the failure of the South Improvement Company forced Rockefeller to consolidate the oil industry by force. Through hostile take overs, Rockefeller initiated the Cleveland Massacre that would enlarge Standard Oil and its grip to the American oil market.
Bibliography:
Klein, P. & A. Hoogenboom. A History of Pennsylvania. Pennsylvania: Pennsylvania State University, 1980. 

Kohn, G. The New Encyclopedia of American Scandal. New York: Fact on File, Inc., 2000. 

“The Cleveland Massacre.” PBS. Accessed March 30, 2014. http://www.pbs.org

2 comments:

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  2. Hi, thanks for sharing this post with us, it's nice to have a quick look back in the history to have a complete insight on what's happening now in the industry.
    In my company's case, the real growth came when I got dynamics 365 for operations and hired an external manager to take care of the business.
    Best regards.

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