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

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