Financial History 25th Anniversary Special Edition (104, Fall 2012) - Page 41

HENRY FLAGLER, © Flagler Museum Archives AND THE STANDARD OIL 1870s OIL WAR BY ALAN LAVINE Henry Morrison Flagler, May 15, 1888. Henry Morrison Flagler is most closely associated with the development of Florida, its railroads and luxury hotels. Called the father of Palm Beach and Miami — playgrounds of the rich and famous — he is honored on the exclusive island of Palm Beach with a stately 125,000 square foot museum. But less may be known about Flagler’s business life, and the wheeling and dealing that he, as second in command at Standard Oil Corp., used to gain control of the nation’s oil business. In fact, Flagler was credited with spearheading an all-out oil refinery war, dubbed, “The Cleveland Massacre,” in the late 19th century. With only an eighth grade education, Flagler drew up Standard Oil’s incorporation papers in 1869. Flagler and John D. Rockefeller had met in Ohio, where both had been grain merchants. Rockefeller left his job to start an oil refinery in 1867. In need of capital, Rockefeller approached Flagler, who obtained $100,000 from his brother-inlaw, Steven Harkness. In return, Flagler received some 25% of the stock. A partnership, involving Flagler, Rockefeller and Samuel Andrews, in 1870, became the joint-stock corporation, Standard Oil. They issued 10,000 shares of stock at $100 per share and raised $1 million. A chunk of the company’s capital was used as a war chest for mergers, buyouts or as a cushion to cut prices and put others out of business. Cleveland was the nation’s oil refinery hub, and by 1870 Standard Oil was already the world’s largest oil refiner. At Standard Oil, Rockefeller was known as the idea man. Flagler, 37, and nine years his senior, was the man of action — an adroit strategist and skilled negotiator. Rockefeller indicated that the tenacious Flagler, whose idea it was to incorporate Standard Oil, was the brains behind the company. When once asked if Standard Oil was his idea, Rockefeller responded: “No sir. I wish I’d had the brains to think of it.” The Rockefeller-Flagler game plan was for Standard Oil to be a large company that benefitted from economies of scale. There was a huge worldwide demand for kerosene, primarily used for lighting. The United States was consuming more than 200 million gallons of oil annually. Oil exports totaled 418 million gallons by 1880. In those days, anyone could refine oil for as little as $10,000 — the equivalent of starting a small business today. All you needed was a large vat, sulfuric acid, stills and pipes. Standard Oil had a large plant in Cleveland, which was relatively close to the oil fields in northwestern Pennsylvania. The company had easy access to the Erie Canal via Lake Erie and two railroads — Lake Shore, owned by the Erie Railroad, and the Atlantic & Great Western Railroad, owned by the New York Central Railroad. Standard Oil owned two warehouses in New York City and used its own boats to transport oil from the rail cars to the warehouses. Standard Oil made its own barrels, and produced the sulfuric acid used in the refining process. Later in the decade, the company owned tank cars and pipelines. Although in the 1870s Standard Oil was the nation’s largest oil producer, it was in a viciously competitive business. A freight price war had broken out between the Erie Railroad, owned by www.MoAF.org  |  Fall 2012  |  FINANCIAL HISTORY  39