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So, history and facts going up through 1890. Welcome to season 9 episode 4 of Acquired. The podcast about great technology companies and the stories and playbooks behind them. I'm Ben Gilbert and I'm the co-founder and managing director of Seattle based Pioneer Square Labs in our venture fund PSL Ventures. And I'm David Rosenthal and I am an angel investor based in San Francisco. And we are your hosts. Today's episode is 150 years in the making. David somehow we miss this IPO if or when it happened. And we still get secondary shares put together a little SPV. I think it might be a spin off or something like that at this point. Okay. At least the standard oil that we will cover today never IPO'd. It was privately held the whole time. Its financials were kept very secret. That must be why we have missed it until now David. Truly. Yeah, must be. Must be. Well, this episode on standard oil is of course the oil monopoly founded in the 1870s by John D Rockefeller, the wealthiest person in modern human history. Embarrassingly until I had started to do the research I didn't realize the oil and standard oil did not refer to gasoline at least until much much later in the life of the company. Automobiles Model T was like 1910 or so. Totally. Standard oil predates the Ford Model T by like 40 years. Yeah. John D becomes the wealthiest person in like modern human history before death. Gasoline. This is a different kind of oil. Yeah. Gasoline helped later turns out compounding can kind of show up, especially when the second business line gets layered on top, but we will get into it. Listeners, the other thing that is crazy that I want to point out, I didn't realize how much standard oil is very much with us today, despite being famously broken up, the parts went on to become both Exxon and mobile marathon, Amaco, which of course is now a part of BP, Chevron and several other companies. When you look at a gas station, you are probably looking at some remnant of standard oil. This is wild. So this one will be at least a two-parter. It turns out the company responsible for creating the entire modern energy industry has a lot of wild stories. All right. I would like to welcome our presenting sponsor for all of season nine, pilot.com. Pilot is the backbone of the modern financial stack for startups and is backed themselves by all star investors like Sequoia, index, Bayzo, Sex Petitions and Stripe. They are truly the gold standard for startup bookkeeping. Ben Dino, who else started their career as a bookkeeper? John D. John D. Rockefeller. That's right. Today, he would have started his career working for pilot. Now over to our conversation with pilot co-founders, Wiseem Dacher and Jessica McEller. After nearly every technology startup, finance and accounting is not one of the things that matter and that you should do in-house. Startups have been outsourcing their finance and accounting for decades. What changed that enabled you to actually build pilot as a technology company around this? So I think there are really two trends. The first is really the rise of fintech, the rise of sass, the rise of the cloud and this back office stuff. I think even 10 years ago, if you look at the landscape, Stripe didn't really exist, expensive, I didn't really exist, Gusto didn't exist, your bank statement was literally a thing that arrived in an envelope at your home or your office. So the fact there are these best of breed electronic systems that you can use to help you around your back office and that they all have APIs is what enables a key portion of what we do, which is the ability to programmatically ingest and transform data from a variety of data sources. The second thing though, I think is really a shift in the consumer's behavior. Even 10 years ago, probably what the business owner wanted to do was to go downtown with the shoebox receipts to visit their accountant in person and talk to them in a office with a lot of mahogany or whatever. And actually what the business owner wants now is the convenience of being done electronically, of being done well, of being able to take care of this stuff, you know, Saturday at 11 PM in their pajamas. You can learn more about pilot and whether they can help your company eliminate the pain of tax prep and bookkeeping by going to pilot dot com slash acquired and thanks to a seamen Jessica, all acquired listeners, if you use that link, we'll get 20% off your first six months of service. Love pilot. All right, well, listeners before David takes us in as always, this show is not investment advice. David and I may have investments in the companies we discuss unlikely in this case. This is for information entertainment. Let us know if you find the standard oil stock ticker. We'd love to go check it out and evaluate no without further ado, standard oil. Maybe pitch book has some data on them. All right. I just want to give a lot of love to Ron Chernau, who is one of like America's greatest historians, a biographer of Hamilton. He wrote the book that Hamilton's based on the play, right? He wrote the book that Hamilton's based on, yep. And also wrote Titan, the definitive biography of John Davidson Rockefeller that is the main source for this episode. It's so good. It's so good. And I think the perfect place to start is with one of Chernau's quotes at the very beginning and the introduction to Titan, where he says the story of John D Rockefeller transports us back to a time when industrial capitalism was raw and new in America and the rules of the game were unwritten as yet. I think more than anything we've covered on this show, standard oil wrote the rules. The way business is done. The way business is done. The unwritten rules, they wrote the unwritten rules. And then, you know, Congress wrote the rules about them. But we'll get started. The era that we should think of here, you know, this isn't the wild, wild west. This is the wild wild east where 30, 40 years after our nation was founded here in the early 1800s, the freaking civil war hasn't even happened yet. Nope. No Texas, no California. Yeah. Certainly early, and corporate law, but we're early in like all forms of human organization in the United States law of what is law? Speaking of, okay. So we start in 1810 in Ingram, New York, which is actually like not that far from Manhattan. But back in those days was a different world. We start there with the birth of William Avery Rockefeller. Big Bill. He would also go on to have another nickname. His other nickname is Devil Bill, not as good. He got because of his profession that he would grow up to, which is, of course, what we're talking about. John Rockefeller's father here. Devil Bill, big Bill, was literally a snake oil salesman. You know, like people use the term like, oh, like, oh, man, he's a snake oil salesman. Like, this is where the term comes from. He sold medicines out of his like pack that he rode into town on a horse that like professed to be a doctor, but didn't do anything. And then he got out of town before anybody realized. So one day when he is 26 years old in 1836, he rolls into a new unsuspecting community to offload his goods on, shall we say, richford, New York, far, far, far away in Central New York state. There he encounters the Davidson family. The Davidson's are quite unlike Bill and the Rockefeller clan. They're upstanding. They are upstanding. They are devout, religious, Christian followers. They have different moral compass than Bill, shall we say? Well, yeah, and they're wealthy. That is the other thing. They are quite wealthy. So Bill's wildbills, young Bill's, big Bill's eyes light up when he sees the Davidson ranch. And he, so the story goes, I think this is actually true. One of his like sort of tricks of the trade, if you will, was he would pretend to be deaf and he would carry like a chalk slate around his neck and right on it and pretend to be deaf and couldn't speak. And he's at the Davidson house and he's seated doing this little charade. And he hears the second eldest daughter of the Davidson's, when we named Eliza, pretty young girl, say, I would marry that man if he weren't deaf and dumb. And miraculously, oh my God, the beauty of young Eliza hears Bill of his affliction and he can speak and he can hear amazing. So the patriarch of the Davidson family, one John Davidson, remember that name, he's a little suspicious of what's going on here. But nonetheless, Bill, Wu's Eliza and they are married. Shortly thereafter, they get married, they settle down, you know, Bill builds a house, like literally people like Bill, their houses back then, lowways down the road. Bill's like, well, we need a housekeeper here. And I've got this old friend Nancy. Why don't we have Nancy move in with us and be our housekeeper? Well, it turns out Nancy was his girlfriend. Yeah, oh, this old friend, you know, she can help with the kids, the housekeeping. All right. So we're painting the picture here. Like you've got this unbelievable swirling concoction of well to do religious by the book, mom's side of the family, dad's side of the family, not quite as upstanding of a human being. But here they mix and one July evening, all of these forces swirl together and July 8, 1839, Eliza gives birth to her second child. It's the first son. They decide to name this child after Eliza's father, who was John Davidson, they named the boy John Davidson Rockefeller. At oh boy, does little JD have a lot of both John Davidson and wild Bill Rockefeller in him. So on the Rockefeller side, little John is like totally captivated, totally doats on him. He thinks he's the best. He would even for the like the rest of his life Rockefeller would intensely defend his father. Now would write that in no area did Bill impress his eldest son more or did his eldest son prove more impressionable than in the magical realm of money. Big Bill had an almost sensual love of cash and enjoyed flashing plump rolls of bills. And indeed, one of Bill's companions at the time would say of him, quote, the old man had a passion for money that amounted almost to a craze. I never met a man who had such a love of money, except of course for his son in the future. And this is where we start to get into the ways in which his son would become like him, but different. And the like him is of course in this love for making as much money as possible. The way in which it is different, you know, Bill would come back from these trips and he would have a fat water cash and he would take the hundred dollar bill and he would put it on the outside. And make sure that everybody knew that there was at least one, maybe lots of hundreds in this fat water cash. Whereas John D would grow up and detest shows of wealth. I mean, the smallest house on the nicest street in Cleveland, he mixes his mother's side of the family into these lessons from his father. Oh, totally. Well, so speaking of, you know, his mother, the Davison's were Baptist. And that was well, not unique, but pretty different than some of the original protest and groups that had come to America, you know, a generation or two before the Baptist, you think like church revivals, you think like big, showy, theatrical. The whole point was to evangelize and to recruit. They didn't think that they were like the chosen people that were going off to the new land to be by themselves. They're like, no, no, we're going to take over the world here. We want everybody on our side. It was an evangelical religion. So here is where these two sides of John's maternal and paternal sides here seem like oil and water, oil and water. You, David. They're not. The Baptist are all about the money. They think money is also great. They just think it's great for a different reason, which is that the more money, the more influence, the more followers we can recruit into the fold. And this also has a huge impact on JD. He would say later, quote, I believe the power to make money is a gift from God, just as are the instincts for art, music and literature to be developed and used to the best of our ability for the good of mankind. Having been in doubt with the gift, I possess the gift to make money, I believe it is my duty to make money and still more money and to use the money I make for the good of my fellow man. Boom. I mean, duty. He heard the word duty in there about making money that is God has asked him to go forth and make as much money as humanly possible. It is this incredibly unique thing about John DeRoccafeller where when you describe him as one of the wealthiest businessmen of all time and a philanthropist, it's very different than the way that you would describe today's billionaires as wealthy people. And it's not one then the other. It's not career and then philanthropy. John DeHeld these things to be intertwined that he should go make as much money as possible and to be simultaneously incredibly philanthropic. And the purpose of making this money was to be philanthropic as if he were a better charitable allocator than anybody in every dimension. Health, power, control, philanthropy, impact, John DeH makes Bill Gates or Mark Zuckerberg look like children. Like, it's wild. So in 1853 when John is 14 and just on the Cusp of Manhood, Bill swoops in, comes back from one of his trips and decides and ounces that he is going to move the family away from New York to Ohio. Specifically to Strongville, which Ben is, you know, is right next to Cleveland. For sure. Strong's fellow Ohio. It's one of many wonderful suburbs of the Cleveland area. Yeah. This is like your homecoming this episode. It's true. Like a lot of this episode takes place in places that were within like a half hour drive before I grew up. Oh, so great. So the stated reason for the move is that Bill wants to go open new territories for his business. But there's actually another reason which is he's got another new girlfriend back in New York named Margaret and he wants to keep the family smart separate. But he wants to marry this new girlfriend and it's kind of things like this is the world that America was back then. He's like, well, if I just get like a state border between the two of them, great. I don't see why I can't have to why. It's true. There's no internet. State registries are probably pretty hard to go look something up in a different state. So they moved to Ohio. And at first before Bill marries his second wife, concurrently, Margaret, he sends John and his little brother, William, to a boarding house in Cleveland to go to like a real high school in Cleveland. And that goes on for about two years. And then when Bill actually marries Margaret, he sends a letter to John and says, ah, you know this schooling thing and the well, well, plans have changed and I can't really pay anymore for you and William to go to school. So I'm basically deputizing you now as head of household and you're going to have to drop out and get a job and find a way to support the family. Best of luck, son. Talk about a wild thing to just hear and totally hijack your life plans. Totally. And this really was not what John was planning, but he decides. If I remember, he's got this love of money. He's like, whoa, what can I do to make money? Well, what if I stay close to the money? So he pays $40 and does a three month crash course over the summer in bookkeeping and decides that he's going to become a bookkeeper. And this is going to be his path to supporting the family. Ever the sensible fellow when he finishes his training and he's off to cook at a job, he decides that the way he's going to job search is he gets a directory of all the businesses in Cleveland. And he looks up what their credit ratings are and decides that he's only going to target the ones with the best credit ratings. He's smart. I mean, to the extent that he thinks that the access to capital is the thing that he wants to be close to, you may as well only be a part of businesses with the best access to capital. Strength leads to strength, right? So the story goes that he pounds the pavement for six weeks. He goes there every firm on his list. They all reject him, but he's undeterred. And he just starts back up at the top. He goes to see all these companies, like at least two, some of them three times. Finally, one company, the partnership of Hewitt and Tuddle, they probably just get so tired of this little kid, the 16 year old kid banging on their door at the time, like, all right, fine. You can start. You can work there. You can be a junior bookkeeper. This happens on September 26th, 1855, and get this for the rest of Rockefeller's life. He celebrates September 26th as his job day. I love this. Like more sacred than the birthday. Job day was the day. It's like the day he was baptized into capitalism by being able to make money in the world. Absolutely. And literally, it's like, this is the big deal every year in his life. Like, it's bigger than the birthday. It's job day. Except he's, you know, he's starting in labor, not in capital, but he makes the transition pretty quick. Don't worry. He becomes basically like the best bookkeeper that history had seen before, since at least until pilot. He, uh, turn out right about this. John betrayed a special affinity for accounting and an almost mystic faith in numbers. For Rockefeller, ledgers were sacred books that guided decisions and saved one from fallible emotion. Well, of course, they're sacred. The numbers in the books are money. And it's the divine, you know, God given path to be close to the money and get as much of it as possible. Absent the divinity. This is very buffet-esque. I mean, at a young age, having this sort of respect and obsession with the numbers. Supposedly, when John was a younger kid, he would also like go to the general store and buy like a big block of candy and cut it up into little pieces and then sell the little pieces or other kids. Oh, no way. Yeah, just like buffet and gum, right? Yeah. This sticks a gum. So he goes to work in this firm. Now, what is he would in total? They are a merchant trading firm that specializes in produce commodities like foodstuffs, like things that people would eat, you know, meat, vegetables, produce stuff that's coming off of the farms going into cities like Cleveland. I assume they mostly dealt in foodstuffs that came into Cleveland to then be sold in stores and consumed by the newly rising urban populace. So John D is rising quickly through the ranks pretty much immediately. They give him a 50% raise because he's doing so well, even his little kid in the beginning of 1857. So not quite two years after John joins the firm, Tuddle, the junior partner, leaves to go seek his own fortunes out from under the thumb of the senior partner. Hewitt. It's like, all right, well, John, you're my new partner, not partner, but you're going to take Tuddle's role here. John is like, well, that's nice. Are you going to pay me like a partner? And hewitt's like, dude, you're like 17 years old. No. John is undeterred though. This is pretty crazy. So he's like head of household supporting his family. He's already making a lot of money. He's got this great role. But the next year in 1858, he's like, I think I'm doing the work of a partner in a merchant trading firm. I'm going to go be a partner in a merchant trading firm. So he hooks up with a much older gentleman named Maurice Clark that he had met doing his bookkeeping trading. And they go in 50, 50 on a new merchant firm called Clark Rockefeller. And like doing the same thing, still produce and meats and trading food stuff. Exactly. Food stuff's produce. Things go like, okay, at first for a couple of years. What is this like 1859, 60? Yeah, 5960. They manage between the two of them to put $4,000 in capital into the firm to start the trading operations, which was a lot of money. And Rockefeller put in half of it. It wasn't Rockefeller like finding ways to borrow from Devil Bill. Devil Bill definitely had his sticky fingers in all this. That is for sure. So things go like, okay, but they have some losses. They actually have to bring in a third partner, I think in 1860, to sort of shore up some losses and bring more capital into the firm. And just to put a point on that, the reason the capital is so important is they basically need to have enough on hand to basically make the purchases and then hold the inventory until they can go and sell it. There's a cash flow cycle there that they need to have enough capital to be able to manage that cash flow cycle. Yep. So, you know, things are going, okay. In 1861, something big happens in America, something very big. The North goes to war with the South. Yeah. For it's up to the Civil War. One, Rockefeller doesn't fight in the Civil War despite being, what would he be, 21, 22 years old at that point in time, like prime fighting A.G. Hires a substitute. There was technically a loophole. He was, if you were head of family, you didn't have to fight. You know, Rockefeller is careful in how he messages the strife going on in his family. He never throws his data to the bus. He always holds everyone at least outwardly in the highest of a steam. And so the way that he sort of drops a hint here at some point is he says, how could I go fight in the war when the business would die? It was young, it was fledgling, and so many relied on it. And that's sort of him alluding to, like, look, like my whole family kind of needs this business to stay alive. Yeah. So he doesn't go fight, but for his business that he needs to survive, the war is a pretty big boon for commodity prices, specifically food stuff prices. I mean, you got to supply an army with food somehow. Yeah, there are a lot more orders and demand for, you know, pork belly and the like coming in thanks to the war. So this drives up the price of foodstuffs through the roof in 1862. The first, like, full year of the war, the firm, Clark and Rockefeller, they make a trading profit of $17,000, which I believe was four times all the money that they had made in all the previous years of operations of the firm. Wow. They are living large, like they're swimming in profits. You can't buy enough. They got to put this money somewhere. So what do they do? Well, right around this time, people in Cleveland are starting to hear about an interesting development that's happening not too too far away in Western Pennsylvania in a tiny little hamlet called Titusville. Ben's obviously smiling here. Some of you are maybe smiling. Yeah, I just did a zillion hours of. But probably most of you are like, what are you talking about here? Like Titusville, Pennsylvania, like I have no idea where you're going with this. Everyone knows David that the center of the oil world is not the Middle East or Russia or Alaska or Texas, but Western Pennsylvania. Western Pennsylvania. That's right. So I had no freaking clue until reading Titan during the research for this episode for like decades, the entire center of the oil industry in the world was this small little town for like 50 years. Like literally, I mean, there were some producers, some oil rigs elsewhere, but like very small. Like most of the oil in the world came from Titusville, Pennsylvania. Yeah, crazy. Just wild and not just Titusville, but oil creek and other areas of Western PA that had oil discovers. This is all going on. It's not that far away from Cleveland. For the first couple of years of this going on up until the Civil War, the whole industry is just based there in Titusville. They drill for the oil. The oil comes out of the ground. They refine the oil. They make caracene. When we say they were refining, like it was a pretty rough process. I think pretty early they figured out you could use sulfuric acid to refine and separate the caracene out, but a crap ton of sulfuric acid and like doing this in large wooden boxes with cracks in it everywhere and it's just sloshing around and spilling all over the ground. Like it is a gnarly process of quote unquote refining. Yeah. Super, super gnarly. But right as Rockefeller and Clark have all this money, they need to have something to do with people come up with the idea. Like so with the oil, they were finding it in the caracene. Caracene, the main use was to burn in lamps and where do you need lamps in artificial light more than anywhere else? You need it in cities. People realize you don't actually have to refine the oil in the same place that you drill for the oil. So all of a sudden now people like, wait, wait, we can buy the oil that comes out of the ground crude oil from Titusville, bring it into our cities, refine it in the cities and then sell the caracene in the city. That's like a really good business. That's a good place to park some capital. Totally. And at the same time, all these interesting tailwinds are happening where cities are blowing up. I mean, you have this sort of like industrial revolution that's happening where people don't just live in rural areas and farm anymore. They're starting to be a lot more industry in cities. You have for a while only rich people could basically get oil to burn at night. Most people with just the sun would go down and then they have no light. They'd go to bed. But like, well, well, well, yeah, right. The oil industry, which isn't that where halfway of Berkshire, that's where half the way of Berkshire, half the way came from. But caracene's like way cheaper than whale oil, which had a massive shortage and is obviously terrible that we kill whales to harvest the whale oil. Like way cheaper, way more plentiful. It's a pretty clean thing to burn relative to the other stuff that people were trying to burn. This is huge. And the key word is you know, it's cheaper, of course, easier to drill into the ground than go like Harpoon, a whale. Yeah, this is an infinite resource here. Not totally. But the plentiful is the key word. So like you said, it was only rich people that used whaling oil that they could have light at night. But the new demand like of it, the civil war going on, the war and then industrialization afterwards, you need light for commerce, for like industry. It's not just so that rich people can have light. You need to like operate factories and like do all this stuff. You need light so there's a lot of demand and kerosene is the answer. So Rockefeller is like, oh, okay, cool. Like this is new commodity. They start trading a little bit in this. Clark and Rockefeller. They start making some profits. But of course Rockefeller is feeling a little hesitant to do too much of it because he's like, ah, this is speculative. Like who knows when this will dry up and you know, there've already been some like boom bus cycles in this like food stuffs are kind of our thing. So I don't want to dabble too much in this speculative weird oil thing. And I think initially they were trading crude. But then like I said, people start to realize, wait a minute, we can refine in the cities. And this is like really like early knowledge. This would be like in, I don't know, 2011 if somebody came to you and were like, hey, this is thing called Bitcoin. And don't just buy it. But like, I know how to set up rigs to mine it. You know, I'd like, wait, why don't we just take some old computers you have and like find it. So this is like really hard to get knowledge. And it just so happens that the one guy in Cleveland, got named Samuel Andrews, who knows how to refine oil is buds with Rockefeller's partner, Clark. Well, that works out. He's like a chemist, right? He's a chemist. Yeah, chemist in quotes here. Well, but there's like real science involved in like applying the sulfuric acid and you know, separating the caracene from the gasoline and other crap that's left over that you don't have anything to do with. Which by the way, they just pour that stuff into the river. Oh, totally. In fact, this is fun little Cleveland trivia, the Kaya Hoga River caught fire many times. There's this great legs brewing company beer called Burning River Ale. Oh, and this is where it comes from. Totally because under the cover of night, these refineries would have all this extra gasoline left over. Cars wouldn't be a thing for 30, 40 more years. They thought the gasoline was like useless and they would just like trip it into the river. Yeah. Oh, awful. God, just wild. Just wild. So Andrews, the chemist who knows how to refine caracene, he's buds with Clark. He goes to Clark one day in the office, the merchant office that they have. And he asks him, he's like, hey, I think it'd be a pretty good investment. I know how to do this. Nobody else around here really knows how to do this. I think it'd be a good investment. Why don't you invest in me and we'll set up a refinery and we'll start refining here in Cleveland. So the story goes that Clark is like, look, I'm not too interested in this. But Rockefeller over here is what's going on and he pipes in and he's like, hey, actually, I think that's not a bad idea. I'm interested in that. And Clark of course knows that Rockefeller is really good at this stuff. And he's like, okay, fine. They turn around. They invest $4,000 on the spot to go set up a new refinery. Wow. So later that year, they open the Excelsior Works refinery and a strategically chosen spot in town. Ben, you'll probably know exactly where this is in the flats, right? Yeah, I think in the flats, it's an area that has access both to the Kyhoga River and to the terminus of new rail lines that are going into Cleveland. Yeah. And like super industrial area, actually in the last few years, it's been like an amazing amount of renovation and like cool stuff that's going on there. So you have this like interesting confluence of the river and like everything left over from the standard oil days and like the steel boom that happened in Cleveland and now this redevelopment, but yeah, it's totally the city area that's up against the water front. Ah, interesting. We'll have to go do a field trip there for sure. We'll do a trouvertrip. So he's like a pagan mud here. I mean, like he was a bookkeeping. He's so meticulous. He loves money. He loves profit. And he was focused on trading before. But now he's got this operation, this refinery. And he becomes like literally, he's like the Morris Chang of oil refineries. He's experimenting with constantly tweaking the process. You know, Andrews, the chemist is like, dude, I'm like the technical talent. But Rockefeller is like everything around it. The operations, how crude comes in, where things are located in the factory. He's AB tested. Like he's doing all sorts of stuff. He's always looking like any efficiency and it's all with a view to it. It's not just like better is good, but it's all the view to like profitability. Like we want to run this as lean as possible and make as much money. God told me to make a profit and I am here to make a profit. By the way, put a pin in that Morris Chang thing because there's an interesting way that they are very much like TSMC that I want to talk about later. So he's focused like this is so different. You know, there are other people that are setting up refineries in Cleveland and elsewhere. But they don't care about optimization. They don't care about efficiency. They're just like, look, hey, it's a gold rush. Give me the gold and I'll just take as much of it as possible. If it goes away tomorrow, that's fine. Yep. High margin dollars just flying out of the ground. All of this, the behavior of the other folks, this causes huge generations in price. Like it really is. It's like the early days of Bitcoin. I mean, still today in crypto, like things are flying around like all the time. Like prices could be $12 a barrel. They could be $12 cents a barrel for oil. And it all depends on, I mean, two things. One is who found what and two is what do people believe people have found recently? And so like prices would be impacted by word of mouth traveling and saying, hey, I heard there's a big gusher going on in this city right now. And people would be like, well, I guess I'm not going to buy for a while because I heard there's a big gusher. And so prices are going to go down. Yep. So rock up really though. He's just got this vision. He's like, oh man, the more profit I make, the more money and more capital I can put into this, the more oil I can hold, the more I can produce. And when the price crashes, I'll just keep buying. Like I'll just keep, he's like, he buys the dip like over and over and over again. And because his operations are so much more efficient and so much more profitable, he can afford to pay like more than anybody else. He can afford to hold this stuff longer. He's like really thinking long term in a way that none of his other competitors are. Oh, and we should say like when we say he's tweaking stuff, he's so much more profitable, he is both horizontally and vertically integrating. So let's talk about vertically integrating first. He's doing things like realizing, geez, we're hiring a lot of plumbers to come in and like, oh, this is so good. I love this. Lay this pipe every time we do a build out. And so they do things like hire their own plumber and hire their own blacksmiths and decide actually we should do this ourselves. And that way we can save all this money on piping instead of buying it from a third party contractor. Later down the road, he even plants a forest, like buys up a forest so that they can cut down the trees themselves to build the barrels out of to make their own barrels. Yeah. Oh my gosh. This is so great. And they save all this money rather than buying barrels from somebody else. And then of course they can innovate on the barrel making process. So he figures out, oh, if we treat the wood in the forest, then it's lighter and cheaper to ship back to the refinery. So he saved all this money on transportation. So that's like the vertical integration side of things, which would be crazy enough. But he's figuring out that, wait, we do this process. How can we sort of use the whole buffalo? Like what can we sell the gasoline for? I think they invent Vaseline. Yes. I think they buy the company that events Vaseline, but yeah, they like petroleum jelly, which is one of the byproducts they commercialize it. So Rockefeller is like, he's like found his calling here. Like this is like divine passion here. There's just one problem, which is the partner, Clark. Clark is like not so into how much capital Rockefeller is tying up in the business here. He's like, hey, we're like merchant traders. The point is profits. And then we keep the profits. And Rockefeller is like, no, like reinvested R&D is like CapEx and an inventory. So Rockefeller starts going around to all the banks and all the finances in Cleveland and lining up. He's not even using just the profits from their operations. He's getting more external financing to finance growth here. Oh, totally. Like when I say both vertically and horizontally integrating and the horizontal sense, he is obsessed with trying to figure out how to be the sole supplier of oil to the world. Like as soon as he figures out that there's economies of scale here, he's like, okay, cool. How do we start the fly? We'll get as much capital as possible, build out as much production as possible, start having agreements with whoever's got rights to the land as possible. So we can start vending to the world. Yep. And on this super strategic choke point of refining in cities. So Clark has like spooked by all this. Turn out has this amazing quote that he finds from Rockefeller. I don't know where he found this. I should look up in the notes at the end of Titan. This is so good. And Rockefeller apparently wrote or said this at some point. Clark was an old grandmother and was scared to death because we owed money to the banks. Oh, so great. So Rockefeller engineers at Coop. This is so good. And some of Clark's brothers are also partners in the business at this point in time. They get into all these arguments. So John baits them one day into threatening that they should just dissolve the partnership. And John's like, okay, great. Let's dissolve the partnership. Because he knows that if he goes to them and says, look, first of all, I don't think you're a risk tolerant enough. Second of all, I don't think you're upstanding. And so I want out like he knows that he loses leverage by doing that. So that's why he baits them into doing their normal thing of getting all up in a fit and saying, we're going to back out. Yep. Totally. So Rockefeller immediately goes to the local paper and places a notice that the partnership is dissolving and that there's going to be an auction for the assets of the partnership, including the oil refineries. And it sets up this showdown where the Clark brothers and Rockefeller bid against each other for each other's 50% stake in the business, which is by the way, a great way to do it. Like if you've got a partnership that's blowing up, all right, whoever wants to pay more to buy the other person out is the person that should get to own the whole thing. And so the idea of a bidding war between the two of them to figure out how to value the business makes total sense. Between the two principles. So Rockefeller, though, remember he's been going to get the relationships with all the banks and finances. He lines up financing in advance of the auction. So he's got basically unlimited resources, although it's still the price ends up stressing him out. He buys Clark's 50% of the oil business for $72,500. And in exchange also gives Clark, Rockefeller gives Clark his 50% share of the produce trading. Which by the way, that's something he probably buys him out for like three to four million dollars, something like that in 2021 dollars. Yeah. So good chunk of change. Yeah. But that 50%. That's 72,500 dollars or, you know, however you want to think about it. That's 50% of standard oil right there. Oh, wow. Rockefeller would say later, it was the day that determined my career, probably bigger than job day. I felt the bigness of it, but I was as calm as I am talking to you now. This is like what we're going to see. Like this man has ice, not ice water, like literally solid ice running through his veins. It's crazy. So this was a big price. It was more than Rockefeller wanted to pay. But this happens in 1865, in the beginning of February of 1865, back to what's going on in America two months later, generally surrenders to Grant and the Civil War is over. And with the Civil War over, what's less important commodity produce trading and what is all of a sudden a hell of a lot more important oil industry, urbanization, everything. Well, because all these soldiers are coming back and getting jobs and factories like you have sort of an industrial boom here. And it's interesting how Rockefeller sort of obsessed with I'm not a speculator. You know, I'm not one of these people rushing to prospect, you know, various plots of land in Western Pennsylvania. It's funny that it's I would say a picks and shovels play. I guess the point to make here is he's doing the predictable, reliable, stable, very strategic part of the value chain. He's not out prospecting land. Yeah. To just doubly underscore strategic did Rockefeller know the war was going to end in two months? Probably. I think Sherman's probably marching to the sea at this point. So turn out rights. Quote. The war had stimulated growth in the use of kerosene by cutting off the supply of southern turpentine, which had yielded arrival, illuminant, called a campion. The war had also disrupted the wailing industry and led to a doubling of whale oil prices, moving into the vacuum kerosene emerged as an economic staple and was primed for a furious post war boom. This burning fluid extended the day in cities and removed much of the lonely darkness from rural life. June, John D Rockefeller would reign as the undisputed king of that world. So he's now got the oil operations, the refining business all to himself. December of 1865, the war is over, all this is going on. He opens a second refinery in Cleveland next to the Excelsior works. The new name that he really chooses, he wants to let everybody know that his oil, his kerosene, his business, his operations is going to be bigger than anyone else. It's going to be the best quality and it is going to rain from sea to sea. What does he call the new operation? Standard oil. Well, first it's the factory is the standard works and then it becomes really. Yeah. The refinery was the Excelsior works and then the standard works is the name that he chooses, the standard is setting the standard. And importantly, yeah, it's about setting industry standards. I mean, for him, he was observing, I know I'm hammering home on this like speculators and cowboys thing, but like especially after the war, you've got all these soldiers who are trying to figure out what to do with their lives and they're going and they're working and drilling. And so you have all these people that have, I think in the book it refers to someone with a gun and a canteen and they're plotta land in Pennsylvania. And I think Rockefeller is basically observing that the kerosene that could power the world is volatile in price. People are scared that it's not safe because it's being refined in questionable ways. And so people's houses are burning down. There's not professionalization in the kerosene industry the way that he wants to bring it. So this notion of standard is almost like kind of like the TSMC chip yield thing. Like everything that comes off of our mind is super high quality. Totally. That is exactly the same analogy. Like this is not necessarily easy stuff to do. They're going to set the standard. And by the way, at this point, he's now figured out that he can run the factory on gasoline. Oh, I didn't realize that. So the standard oil factories are burning less coal than their competitors and using the gasoline byproduct. Oh, that's so great. So they're literally feeding themselves. Yep. So you said something a minute ago when you're talking about this, you said selling this oil, this kerosene to the world. So by the very next year in 1866, America is a big market and it's going to grow hugely especially after the Civil War. But do you know what's a bigger market, the rest of the world? Especially at this point in time. I mean, America is not America yet. It's probably 30, 40 million people. Yeah. Maybe if that. All right. Keep talking. I'm going to Google this. Okay. Great. So by the very next year in 1866, the fledgling standard oil company is already selling two thirds of their kerosene overseas primarily to Europe. It's like one third domestic, two thirds international already. 31 million people in 1865. Wow. So they're selling most of their oil overseas. Rockefeller dispatches his little brother, William, who's now working in the business to New York City to go handle all of the export business for standard oil. Do you know the story about when he needed to raise, I think it was $50,000? Ooh, I don't know. Oh, yeah. Well, it's a great story. So this is in Churnow's book. Rockefeller has a bit of his father in him, sort of a flair for showmanship. And he really needs $15,000 like he needs a loan pretty quickly. And he's sort of looking around for financiers for it. And he dresses very nicely and he presents himself nicely and he walks in areas where he's sure to bump into people. And at some point, someone stops his carriage and looks over and says, oh, Mr. Rockefeller, did you use a $50,000 loan? And of course, Rockefeller is like, jackpot. And he sort of looks at him like without breaking and he looks at him and he goes, hmm, could you give me 24 hours to think it over? Yeah. And of course, by doing that, he gets like the best terms on the loan. It's like, I'm not sure I really need this. He's unbelievable at like getting his hands and way more capital at way better terms than other people would be able to. So good. Now that Williams in New York and the family has got operations in New York, they can get like, oh, Mr. Sir Rockefellers, could you use $250,000 or $500,000? So pretty soon, they're like bringing a bazooka to a like a fist fight with the other refiners out there. And it's kind of like this whole part of the story just reminded me so much of like the Uber days, you know, remember when Uber went out and raised all that money and totally we're going to flatten, lift and D.D. and all the global competitors that like, it was totally was the Uber playbook except it really worked. Yep. Speaking of Uber right after William goes to New York, the sort of, shall we say, Emil Michael character of a standard. I'm sure it's a metaphor. Colorful character comes into the fold in the fledgling standard oil empire. I, I've been posting on Twitter like all the fun stuff like just because I've been enjoying this research so much. And I posted about this guy Henry Morrison Flagler on Twitter and Andy Sparks replied to my tweet with I think like the best one liner about Flagler possible. He says quote, Flagler was savage. And he was really like, you know, Rockefeller, he's driven by this divine calling. He's willing to go to the mat. He's willing to do just about whatever. But it was Flagler and then some of the other lieutenants that he brought in that were like they're the ones who did the dirty work. Oh, yeah, because Rockefeller, you know, he needed to preserve plausible deniability, left, right, and center, especially once they figured out all the business tactics that were really going to let them press their advantage. You know, he had some very bad lieutenants so he could stay as plausibly good as possible. Rockefeller was for sure the one pulling the strings. So Flagler ends up coming into the business because he has a wealthy relative named Stephen Harkness who hears about what's going on and wants to invest like equity dollars into this new standard operation. So he invests $100,000 in the operation, which oh my goodness. Like I didn't actually find like what the net worth of the Harkness family ends up being because of this, but like enormous. Yeah, it has to be just generational wealth. And his sort of one term that he asked for as part of investing is that he wants, I think maybe Flagler was his nephew or something. He wants Flagler to join the firm as treasurer to quote, keep an eye on his investment. And so Flagler joins and literally this is what he tweeted, he keeps a quote on his desk at Standard Oil for all the time he's working there. The quote says, do one to others as they would do one to you and do it first. Oh my goodness. So Flagler takes over the negotiations for shipping of oil with the railroads. If you know anything about Standard Oil, you can see where this is going. When Rockefeller was running negotiations with the railroads, he always was able to get pretty good rates shipping rates because he had a battena being there in Cleveland on Lake Erie. Totally during the summer months in the spring and fall, we can ship way cheaper by sending it out by water by water. Yep. So all the crew coming in from Titusville to be refined in Cleveland at Standard could come in over the water or by rail. And then when it was going out to then go off to the rest of the country and the rest of the world, he had another option. Flagler. He's like, oh, this is nice. That's cute. Let's exercise our power a different way. Yeah. What about if we go to the railroads and we're like, hey, guys, it's really expensive to operate these railroads? What would you say if we were to guarantee a really, really, really large amount of minimum shipments of oil that we'll do with you? And exchange for us guaranteeing you guys like an unbelievable amount of volume that will do on your railroads, you give us an equally unbelievable shipping rate like cost of doing this. That railroads are like, yeah, that sounds good. Except the railroads are like, wait a minute, but you don't make that much oil. Where's all this oil going to come from? Well, specifically the railroads think this sounds really good because with the amount of volume that they're talking about, this means they can run dedicated lines of just oil tank cars, so not mixed trains with like box cars and oil cars like just oil tanks between Titusville and Cleveland with no stops. So if you think about operating a railroads, if you have different types of product that you're loading on to the train, that takes more time and money. They were like being forced to stop to pick up like one car and add it to the train. Exactly. And then all these stops, that just adds up, you know, it costs money, right? You know, time is money here. So they love this. But as you said, Ben, they're like, well, how? Henry, like this is a great idea, but how you can do it? You don't have enough capacity. And two other things before we answer that question. One is just to give like the magnitude of how much this helped them, it lets them own way less cars. Also like the railroad, they get to go from something like needing to have 150 cars to be able to like make the same amount of money on like 40 or something just like dramatically smaller. And the other thing is standard oil has started to like really build up some credibility here because when people were putting oil on trains before they were sloshing around in like open, wooden boxes and like standard oil pioneered, hey, we're going to put them in like tanks and then eventually metal tanks and it really like professionalized the and eventually we're going to make railroad cars that are like the car itself is just a tank. Yep. And fast forwarding a little bit like, oh, railroads, what if we made those tanks for you? But we're getting ahead of ourselves. So if I was like, don't worry guys, I got this. So he goes around to all the other refineries like everybody else in Cleveland and he's like, hey guys, I have negotiated a great rate for all of us. Do you all want to come on board together and we'll all like pool our shipments that we're all getting in for play this field? And by doing this all together, we've got this great rate. And this is an offer that they can't refuse. And not only can they sort of not refuse it because what happens if we say no, but this is their major cost driver. They're in a commodity industry at this point. And so distribution of the oil is actually the big driver of the business. Yep. So okay, everybody's like, well, this is fantastic. I feel like there's like, okay, great, great. Let's do this. But you know, one thing, let's not write any of this down. Okay. Let's just keep this all as a little gentleman's agreement between all of us and the railroads. Nobody knew we don't need any feds sniffing around here. Feds, quote, unquote, if they were even worried then. Well, basically, if anybody ever asks us if we have an agreement, there's no agreement. Everybody can look at each other and go, I haven't seen an agreement. Yep, totally. So this agreement comes to be known as the Lakeshore agreement. Because that was the Lakeshore Railroad was the main railroad that they did this with. And this is huge. So by doing this until this point in time, Cleveland has a city. So if you forget the individual companies of which standard is one with in Cleveland, but just think about refining production of oil in America, Cleveland was actually the number two largest center for oil refining behind Pittsburgh at this time. Once they do this deal, Cleveland is like fast-tracked and becomes number one and standard and Rockefeller and Flagler. They're like the Godfather. They're like, they just brought all the other families in Cleveland to heal. Like they run the collective now. And this starts a playbook of like, if there's oil leaving the city, either it's ours, or we have some agreement in place where like it's good for us, even if it's not actually ours. And maybe a little eventually become ours. Yep. So they dominate Cleveland. Cleveland becomes the number one oil refining center in America. But you know, that's not enough for young Rockefeller. He's got his sights set on the whole industry like Pittsburgh, Philadelphia. There is some refining happening in Titusville, some in West Virginia, some in New York. He wants all of it. So how's he going to do this? As you alluded to at the top of the show, there actually is no legal framework at this point in time for businesses to operate outside their own states. Importantly, they cannot own property in other states. Yeah, they can't own property. They can't have operations. Literally, this, you know, the United States was like, this is all changing after the Civil War, but it was United States like the states were the sovereign, you know, or near sovereign entities here. Totally. And it's really only recently that you could just sort of incorporate your own business as you please at all without getting expressed written consent from the government. I mean, in the days of England and early in the US, like incorporating a company, a corporation was like the government's granting you a special right to operate this business. And so already the doors are needed a charter, literally blown wide open that you can just start a company, but we're not yet to the era of like, oh, I can start a national corporation. Yep. So they think for a while, this whole little crew at Standard Oil and Cleveland about how they're going to do this. They know that if they want to consolidate the whole industry in the whole country, they need a lot of capital and be an ability to operate outside the borders of Ohio. So flagler comes up with this idea. It's financial and corporate law innovation innovation. Did you read about how he comes up with a new structure that they use or I guess was an old structure, but that they wasn't very popular, but they turned to the joint stock company. Did you read about how flagler who was not a lawyer drew up the actual like incorporation? Oh, wasn't it on like a yellow legal path? Yeah, like unlike the equivalent of a yellow legal path. No letterhead. Yeah, totally. Which partially I think was just because that's how like this was still, you know, Wild West type stuff. But also I think they didn't want anybody to really know about this. They wanted this to be super secret. So flagler comes up with the ideas like, ah, these joint stock companies, which I mean, I think like wasn't the Dutch East India company, I think stock company takes this idea, but not many other companies were doing it. He says if we were a joint stock company, then we could buy shares in other joint stock companies. We could also sell shares in ourselves, you know, to raise money or to strategic partners who we might want to have a vested interest in our success. This is interesting. This might solve some of the capital requirements. Okay. Well, that's interesting. And also this like selling shares to raise equity capital thing Rockefeller is like, my God, that is brilliant. How did I not think of this before? Totally. And it's flagler that comes up with this. It's amazing. On January 10th, 1870, they abolished the old partnership and they pour all of its assets into the new joint stock company, the standard oil company of Ohio. Boom, it's born. They capitalize this new joint stock corporation with one million dollars of liquid assets. Like that is how enormous this had become already unheard of. I don't think that there was any other organized enterprise in America with that amount of capital period, any other industry like already, that's how big this is and we're still just getting started. So this doesn't solve the interstate commerce issue though. So they come up with another absolutely brilliant and diabolical plan to solve this, which is the trust. And what they decide to do is they say, well, okay, technically companies can't own shares and other companies outside the state. But what if we create a trust, then this trust holds shares in companies all around the country? The trust could have some trustees that sort of get to decide what happens with maybe all the companies that roll up to the trust, we can sort of make sure that these corporations, each of which are nicely situated inside their own state and don't own any property outside their own state. But like we the trustees sort of get to decide how those companies might work together. Yep. And there's no law that says that officers of any given company can't be trustees of a trust that own shares in other companies. So this is the loophole around it. So they create this trust and the trustees just a dictate to the other companies that they purchase what to do. But also be this is important. All the dividends from all the other companies, the trustees designate the beneficiaries as the individual shareholders of standard oil of Ohio. So nothing ever touches the actual company, standard oil of Ohio. It all goes to the trustees and then to the individual shareholders. And that's how they get around this. Interesting. So the individuals who own the corporation. Yep. Literally everybody on the cap table. Ha. End up being the sort of puppeteer controller and beneficiaries of all these other entities. So Rockefeller is like, oh, this is amazing. It comes up with the idea that none of them are going to take a salary. They're going to focus solely on these dividends that are coming in as like a source of value and income. But also even more importantly, focus on the appreciation of the value of, you know, this whole enterprise. This was new thinking like now people listening to like, yeah, like equity. Why else would you join a startup? Why else would you start a company or join a startup? We had ever thought this way before like the idea that equity and dividend could like that that could be your primary source of income and wealth generation. And that you could use that to incentivize new people who you're bringing into the organization as employees or partners or companies you're buying. Yeah. The idea that like your competitors could become your friends by being able to offer them ownership and the joint combined company where as we win in this industry and this industry gets bigger, we all win by holding shares of this thing together. Yep. Turn out right. Whatever the debates about his ethics, economists and historians have unanimously extolled Rockefeller's role as a pioneer of the modern corporation. And then quoting from another biographer of Rockefeller Rockefeller must be accepted as the greatest business administrator America has ever produced. And it's this. So this is how well this works in the very first year of the trust 1870, first year of all this getting set up. Remember, there's $1 million in total capital. They get put into this structure. They pay a 105% dividend at the end of the year, including also reinvesting tons of cashflow back into the business and expanding and buying other companies. So like the million dollars that was in there, they pay over a million dollars out to the shareholders and have many other millions of dollars to go do other things. It's crazy. They're extremely profitable and they're growing like crazy. Yeah. And let's talk about this Rockefeller's argument to the societal benefit for a moment, which is like a, it's silly that the state borders are preventing up. Like why should that really be a thing? Like to the extent that I've been able to rapidly expand in Cleveland and we've been able to create great product for consumers at a low price quality of life for people has gotten better. And like that has all happened because we've expanded here. Why shouldn't we just be able to do that for people everywhere? And his argument is really like this is for the betterment of consumers. Now my competitors when I move into these states probably don't like it, but like ultimately the American public wins. And he's right. He's totally right. Just like Jeff Bezos would probably say the same thing today. Well, speaking of today and Amazon and great companies, we have a great company that we want to tell you about our second sponsor of season nine, pitch book. Well, I'm going to try and figure out how to work a standard oil. They get in here, David. Do you think standard oil is in pitch book? I kid's not thinking about the fact that they organized this whole structure. They paid a 105% dividend the first year. Like oh, man, this feels like raising a massive growth round from soft bank and then paying out all the money again at the end of the year. Unprecedented in business history. Well listeners, as you know, pitch book has the best that both the widest and the deepest data on private companies in the world, I mean, they're the leading financial data provider for venture capital for private equity for all companies looking at M&A. They have 3.1 million companies and over one and a half million deals. So maybe like half of those 3.1 million companies are probably spin offs of standard oil and actually reconciledated maybe a little bit less, but 96% of their clients rate pitch books coverage of private companies better than any other data provider. And actually a few people have DMed me in the slack about this, but we've got a great offer for you. You can explore pitch books database firsthand by signing up to get limited access. That's free access to the largest database of private market intel for two whole weeks. So you can sign up at pitchbook.com slash acquired or click the link in the show notes and see how pitch book can help you. Thank you to our friends over at pitch book. Thank you. Thank you, pitch book. So David, they've now got the structure in place to become a national trust and expand here. How do they do that? What happens? This is so great from just like this story. The smile on my face is so right now whether it's juicy. Yeah, great. Great is up for debate. So you know, the structure of the joint stock company, they come by and hold stock in other companies that can issue shares, hold it in them. What are they going to do here? Remember, we said the railroads are the most strategic, important supplier and choke point for the industry. Standard goes to the three biggest railroads, the Pennsylvania rail road, the storied, huge, enormous Pennsylvania railroad. I think that's on a monopoly board. It is. It is literally on a monopoly board. Like that is how the Pennsylvania, the New York Central and the area railroads and they say, so we got this new thing. This new thing lets us do things with other companies. Do you want to cooperate as a part of our new thing? We want to cooperate. How about we all do something together? The railroads are like, oh, yeah, we like doing stuff. This sounds pretty good. So they get together. They set up a shell corporation called the South Improvement Company. This is so juicy. Which is intentionally nebulously named. Yes. Like to later in life when Rockefeller would be getting grilled in federal depositions, he would be asked if he was ever a director or involved in the Southern Improvement Company. Which of course is not a thing. No idea. Standard Goiwe was never involved in the Southern Improvement Company. Oh my goodness. So great. Obviously, he was not purgering himself by saying that because the questioner got the name wrong. Like he did purger himself in other SIC related. Yeah, I think he did. So here's the deal. Standard oil is going to set up and control most of the South Improvement Company through their new trust and joint stock corporation structure. The railroads will own a token amount, but the railroads and the principle owners of the railroads, the individuals, they're going to issue some, uh, standard oil is going to issue them some stock so that, uh, you know, these guys now have a, have a little, a little skin in the game with standard oil. All the interests are aligned here. Well, and the railroads had a problem that they need solved, which was that because of the boom bus nature of everything that's going on their cars, especially oil and the sort of remember that thing that I mentioned earlier where people are deciding not to buy because they hear it's going to be cheaper soon because they know there's a big usher like this whole thing is like totally screwing with the railroads, not to mention the fact that with intense competition among the railroads, just like there was intense competition among all of the non sort of standard oil, oil companies, a lot of the profits are just being arbitrage away. And so they've got unpredictable demand. They've got booms and busts. They've got this situation, especially with oil, where like certain types of oil in certain areas were so insanely cheap that like everybody's going out of business because no one can make any money. The same sort of thing is happening in the railroad industry. And so if there's like a cooperation opportunity for the railroads and, you know, Rockefeller's offering them, I can kind of solve your problem here and we can sort of smooth out business. Ben, it really comes down to like, it's really hard to run a business when prices are fluctuating and they're not fixed. So clearly, the answer is to fix the prices. Oh my goodness. We ascribe Noverchute to this. I think the jury on this whole thing, and we'll get to this later in the episode and certainly in part two of like what parts of this were good and what parts of this were bad. It's both. There's lots of both that happened all through this story. Yep. The three biggest railroads and standards they get together in this South improvement company. And they say, here's what we're going to do. All the railroads, we're going to set a new fixed price. There's now a fixed, literally a fixed price for shipping oil on railroads to everybody out there. All anybody is shipping oil. There's one single fixed price and it's really high. Whatever it was before, like it's got multiple of that. It's really high. Except for anybody who's a member with us of the South improvement company, y'all get a 50% discount on that fixed price. And it goes even further. Anybody who's a member of our little company here? One might say a little cartel. Little cartel. Also they will receive a little dividend, a little kickback. They call it technically a drawback from any revenue that any other oil producers that are not part of this, that ship on the railroads, part of that revenue from the really high price that they're charging, they're just going to give some of that revenue to the competitors that are part of this little cabal here. This is the most mind blowing part of the deal. Not only do you get a rebate for shipping with us, so that way the price is actually way cheaper, but you also get a rebate even when you're not the shipper. I mean, they call it this drawback, but like other people ship stuff with us and thank you because you are a nice member of our organization, you're going to get some of that money. So your competitors are just paying you. It's the craziest system ever. I don't know what the formal definition of the crime of racketeering is, but this sounds like whatever it is, I think this fits the case. Well, there's a couple different ways that this story draws parallels to Microsoft, but this reminds me so much of that CPU licensing thing that they did. Do you remember this in the early Windows days? The deal that Microsoft cut with, I think it was IBM was, yeah, you guys can use Windows and that's great. And any computers that have a CPU in them that aren't running Windows, you're also going to pay us for those CPUs. And that's the deal they signed. And so Microsoft basically ended up with the monopoly, the entire industry because IBM's like, well, wait a minute, whether we're putting Windows on these machines, we're not, we're paying for it. And so I think Windows is. And actually, I don't know if it was Windows yet. It might have been DOS. If only Gates and Bomber and Jeff Rakes and all the like, if they'd had our episodes here on Stator Road, I'll listen to you before they put that stuff in writing. History could have been different. It turns out, yes, this may have been a flashpoint once the public realized how egregious this sort of agreement sounded. I'll say there is literal rioting in the streets in Titusville in reaction to this once word gets out like literally like people are like fighting in the streets. They're like banging up and destroying, you know, standard tanks and property and like, I mean, it's truly heads I win tails you lose for standard oil versus their competitors. Yep. This is the point where public opinion really starts to get concerned about standard oil. In particular, informed by the competitors because the public public is like, great, like we're getting so much stuff so reliably for so cheap, this is awesome. Yep. So the railroads, they know they may be gone a little bit too far. And they're like, guys, I don't know that we can actually do this and rock feller flagler. They're like, it's okay. Let's just like hold out for a couple of weeks. I think we're going to be fine that we're going to go do some stuff and we'll get back to you. So during these few weeks, when this deal has not yet gone into effect yet, but rumors of it are spreading throughout the industry. They're in Rockefeller, go around to all the other refiners in Cleveland. Keep in mind, many of them are in very rough shape right now because a, the fluctuations, but b, oil prices are getting driven down so far that like people are trying to produce and make profit on this. But like, because of this crazy inflation, then deflation thing that happens, like a lot of these companies are slowly on their way to going out of business anyway. Yep. And they're already kind of brought to heel by standard by the Lakeshore deal where they're already sharing capacity. So now, flagler and Rockefeller go to them and say like, you know, that great rate that we organized for you, it's over. Y'all heard about this South improvement company thing. It's happening. So the way we see it, you basically have two choices. You can stay nominally independent and you can die or you can just sell your operations to us, come in and join the fold. Get some standard oil shares. We'll even give you stock. And then we can all profit from this amazing deal that we have. And there's something Larry says, like Rockefeller says, own shares of standard oil and your family will never go hungry. Yep. So as Ida Tarbell, who we're going to talk much about next time, wrote in her investigative reporting on standard oil, this is what she claimed that the standard pitch was to other folks about joining the scheme. Quote, you see, this scheme is bound to work. It means an absolute control by us of the oil business. There is no chance for anyone outside, but we are going to give everybody a chance to come in. You are to turn over your refinery to my appraisers and I will give you standard oil company stock or cash as you prefer for the value that we put on your business. I advise you to take the stock. It will be for your own good. So they're literally just saying like they're deciding what value they're going to pay for all these refiners. And of course, the offer that they put in is like 25 to 50% of book value. Yeah. What the refiners even paid to build the factories in the first place. And Rockefeller's argument is like, well, we're just going to shut most of these down anyway. I mean, we're actually doing them a favor by taking this thing that's just going to go out of business over the next few years, giving them some shares in our company as like a, you know, we don't want to be too terrible to these guys. There are our fellow countrymen and they're also in our industry and we're just bringing them in, we're giving them some shares. And I, you know, I'm going to write the whole thing off anyway. So it's a crap factory. So over a period of six weeks from February 1872 to April 1872, standard oil buys 22 of the 26 other refineries that are operating in Cleveland. And this comes to be known as the Cleveland massacre. And then once they are the own all the refineries and Cleveland, they're like, all right, we're done. You know, we don't really even need this South improvement company thing anyway. And I guess the public doesn't like it. So we're not going to do it. And apparently not a single barrel was ever shipped using the South improvement company. They never documented anything but structure. It was all set up and agreed upon, but then they didn't actually ever need to do it because they used it as leverage to just go and roll everyone up anyway. And this was the tipping point. So obviously this was the Cleveland refineries first, but then immediately after they go to Pittsburgh, they go to Philadelphia, they go to West Virginia, they don't even have to set up some ploy shell corporation like the South improvement company. They just go to all the other refineries and these cities and they're like, you all heard about what happened in Cleveland. We're coming here next. So you want some shares? You want some shares? Yep. By 1877, standard oil controls 90% of the oil business in America. 90% as barons put it consumers of kerosene had no choice but to purchase the product from a standard company. Not that they complained, standards policy was to upgrade the product continuously while lowering the costs in order to frighten away potential competitors and increase sales. I just want to say David, like just like TSMC, it's like, yep, I think it's something like 70% of the leading edge CPUs flow through the island of Taiwan and 50% are actually TSMC manufactured by TSMC and like, we're all better for it as consumers. And I think it's just fascinating this notion of like we're at a keep lowering prices, the product's going to keep getting better and at the end of the day, it actually is good for consumers. Oh, and we're going to get huge and super profitable on the way. Yeah. You know, SML and all the equipment manufacturers, they're kind of like the railroads here. Right. Although amazingly, this cooperation with the railroads really didn't lead to standard oil squashing the railroads. Like they stayed really good businesses for a lot of time. Oh, well, they did for other industries. Or at least I think they did. I don't know enough to say about the railroads. They certainly stayed independent. But you know, Rockefeller and Flagler and this whole crew, like these guys at Paranoid as well, right? Like they do realize after they've just gone and consolidated the whole oil industry, they know that the railroads do have strategic leverage over them. And again, remember like the oil refined, they let the other refiner stay in business. They just, you know, bottom and gave them standard oil shares. They're worried about the railroads. So like we don't want them having strategic leverage over us. How can we co-opt them? So I mentioned earlier, tank cars. Yeah. What was the deal here? So right around this time standard starts going to all the big railroads and they're like, you know, we've saved you all this money on OPEX. Now you get to run trains directly, you know, no stops, no box cars. This is great for you. But these tank cars, these modern tank cars, you know, made a steel and they're like, that's a lot of cat backs for you to keep building. And we just keep sucking up all this shipping volume with y'all. What if we just make these cars for you? And we leave some back to you. We'll take on the cat backs to make the cars and we'll leave some to you at a really low rate. So what's the play here? So Cherna writes about this. He says as the owner of almost all the eerie and New York central tank cars, standard oils position grew unassailable. At a moment's notice, it could crush either railroad by threatening to withdraw its tank cars. No tank cars, no business. You can keep running this great business for y'all. But you know, you mess with us. We can withdraw our tank cars. Wow. And so now they've got 90% market share of kerosene and they've got this relationship with the railroad where they basically are going to get the most favorable rates without a railroad going out of business. And then they take it one step further. I get. So by the way, David, you laughing through this like maniacal plan. You're like the nicest. It's so scary because I'm like, I just have implicit trust in you. Like you're so kind and you're so warm and you're so. And like you're like, and then they take it one step further. And then they stab the knife in the back again. And it's so great. Oh, this is such a good story. I love it. Not condoning this behavior by any stretch of the imagination. An important pillar of American history. A critical part of American history. So okay, they take it one more step further. And this is really the coup de gras here. So as they're doing all these deals and setting it up and standard oil is becoming this octopus, as it would be known, the drugatory term by its critics. The octopus, you know, like you think the Goldman Sachs vampire squid sucking on America was fat like literally the standard oil octopus is bigger than 10 vampire squids. So there's a new technology that people are thinking about with regard to oil, not gasoline, not yet. That's coming later. But all of the, you know, the oils being moved around either by water or on railroads. All they're thinking that like there might be a way to move oil much, much, much more efficiently. So the concept of pipelines already existed, but really short distance pipelines, literally from the Derrick's from the wells to the railroad depots. So this would be like, you know, a mile at most. They would pump oil through pipes to the railroad depots or to the, you know, shipping depots or whatever to then load it up in cars and get it out of there. Some people start thinking like, well, I wonder if we could pump oil a lot farther than just a mile or two. And meanwhile, the remnants of the industry that haven't yet been consolidated by standard, they're looking for any kind of, you know, hail Mary past to get some leverage back in the industry. So they decide that they're all going to go in together against standard and the railroads, they know they can't get any concessions out of the railroads, they're going to try and develop a pipeline, a long distance pipeline. So in 1877, they do this. They band together and they form the tidewater pipeline company. This just sounds like a scandal right off the bat, like the name tidewater pipeline company. Why would you name it that? I mean, it's 1877. I have no idea. And first, the goal is that they're going to pipe oil from Titusville directly to Baltimore on the sea front. They then shorten it to Williamsport, Pennsylvania, which is still 110 miles. This would be like an amazing proof of concept that this would work. Isn't that where the Little League World series is? It is. It is. Yeah, I don't know why Williamsport was where they wanted to pipe this stuff too, but they do end up piping it. So standard though, fights them tooth and nail on this. A bunch of the execs want to go higher thugs to go like smash the pipeline and do all this stuff. And then the fellow is like he reigns in his exuberant execs on this and says, no, no, we're going to fight it with every like, you know, political leverage that we have, which they do. But they don't succeed. In 1879, the pipeline turns on and it works. And I think a bunch of people in standard are like, probably like pissed at John. I don't understand why he let this happen. And you know, how could this terrible? And Rockefeller is like, oh, don't worry. I have a plan. Now, remember, this is just one route that this new pipeline has opened up, you know, from Titusville to Williamsport. Rockefeller is like, I got all the railroads in my pocket. They go around to the railroads and they tell the railroads, they instruct the railroads to cut shipping rates so far down on this line that literally like they're basically paying anybody who's willing to ship by railroad on this line to ship. So it's actually the pipeline, even though they invested all this money in building it and it's so much more efficient, so much cheaper than running a railcar because at standard oil's pressure, the railroads have now lowered prices so far in response. It's not economic to use the pipeline. So they starve them out. So this is like the Bezos versus diapers.com thing where Bezos is like, I can sell diapers at a loss forever. You understand? That is totally what happens. So the tidewater pipeline company is like up against the wall there about to go bankrupt. They can't compete and by March of 1880, they sell a minority stake in the pipeline to standard oil. Oh wow. Standard assumes control of the pipeline, takes all the technology, immediately turns around and goes and builds out four more major pipelines from Titusville to Cleveland to Manhattan to Philadelphia to Buffalo. So they build these, you know, now pipelines that are huge. Do you know what land they build the pipelines on? This is the most cold blooded thing in the whole freaking episode. No. Okay, so who would have land rights in straight lines between cities? Standard oil goes to the railroads and they're like, my friends. We've got this really exciting new thing that we're working on. We're friends. We help you. You help us. How about we use your land? How about we build our pipelines right along next to your railroads? Wow. And then it'll just be a little reminder sitting to you right there, reminder to y'all that we don't need you, that we've built on your land. You're looking at your competition every single time you glance out of a train car. So if you ever, you know, want to try and screw us on prices. Wow. Just remember, we've got an alternative right there. Wow. Oh my God. So by the way, do you know the deal with Sprint, random business trivia fact? I may have said this on another required episode. I think we've talked about this before. Yeah, that telephone lines were laid along real lines. Yeah, it's the Southern Pacific Railroad, SPR. Oh, yeah, that's right. That's right. And exactly for this reason, like, hey, we need someone who's already eminent domain to bunch of land that we can go directly in a straight line from one city to another. Zoom. Yep. Crazy. Now, I don't know for sure, but I didn't see anywhere that the railroads got any like equity stake in these pipelines. Oh, wow. All right. So I fully take back my comment earlier that it seems like the railroads made it out okay. Well, I think they actually did. I mean, this was kind of Rockefeller style and standard oil style. It's like, we're going to let you live. We're going to be benevolent dictators. We're going to let you continue. You're just going to remember that, you know, our knife is pressed against your back at all at all times. Okay. So after this, it's done. I mean, this is the story of how standard oil became standard oil like Rockefeller standard. Like they have won on a scale that nobody has ever won before. Since their competitors are obliterated, new upstart technologies are co-opted. All of the suppliers, you know, are reduced to total lackeys. We didn't talk about the customers. This is great. Most kerosene sold at retail in America and grocery stores. So right in the sort of early 1880s, standard decides to run the same playbook that they've run with the railroads who with the grocery stores in America. They go to them and they say, hey, you know, it's expensive for you to set up and give self space and everything to all of these cans that are all, you know, non-standardized of standard oil kerosene in your stores. From now on, all standard kerosene needs to be sold in standard canisters that we set the terms on and we fix the price and we tell you where you're going to put it in your stores. So some stores, you just sort of bristle at this and say they're not going to do it. It sends out a letter in Mississippi, they had a particular problem with this. They send out a letter to all the grocers in Mississippi. They say, if you do not buy our oil, we will start a grocery store chain to compete with you and sell goods at cost and put you all out of business. This is in right now. This is in right now. Sent all of them. You can just feel the American public and Washington getting stirred up about like, okay, monopolies are pretty bad. Maybe you really need some legislation about this. Yeah. As turnout rates, by this point in time, Rockefeller's creation could only be discussed in superlatives. It was the biggest and richest, the most feared and most admired business organization in the world. Wow. Wow. In 1883, official standard oil headquarters moves to Manhattan, to New York City and Rockefeller himself. 26 Broadway. To Manhattan, to 26 Broadway. Do you know which is the building that they have constructed for the standard oil headquarters, 26 Broadway right on Wall Street? Do you know what is right outside of 26 Broadway today? No. The Bull, the charging bull. A monster. Literally right outside 26 Broadway. You know the bull was only put there in like 1989, I think. Oh, no. I would have assumed it was there in the 1980s. It was put there after the 1987 stock market crash. Interesting. So Rockefeller and his brother and all of his, their lieutenants, they moved to New York also around this time. They just like buy up Midtown. So Rockefeller moves to write off Fifth Avenue in the 50s. It was a 54th street. Maybe I actually don't ever written down. I was like 53rd or 54th street, right off Fifth Avenue. He buys a house, moves in there. Really right there between the park and between Rockefeller Center. No, there is no Rockefeller Center. They build freaking Rockefeller Center. Which he had nothing to do with. That was a being endowed by his son. But yeah. We'll probably talk about this more next time. I didn't realize it was Columbia University's campus there. And when junior decided to get in and start building, developing a building Rockefeller Center, they lease it from Columbia and then they ultimately buy it. Fascinating. Yeah. Well, part two, I mean, we'll have a lot to say about universities and Rockefellers in New York and we haven't touched a lot on the personal side of Rockefeller other than saying he was deeply religious and believed he should make a lot of money and then do interesting things with it. There's a lot of like very good things he does with it that I think we'll say for part two and a lot of his idiosyncratic things around like being afraid of death and wanting to live a long time in his health obsessions. I think a lot of that especially starts to show up at his old age, but David, bring us home here to 1890. Yeah. So I mean, this is like, it's funny. We're going to, you know, recount now what will ultimately become the beginning of the downfall of standard oil. But like, I don't know like it's weird being at this moment in the story because they've literally won. Like, I don't think we've ever had this before. The only thing that can bring them down is the government or a paradigm shift. I'm referring to like electricity and lights and houses, but they very quickly were saved by the fact that conveniently right around the same time any thirst that we had for oil before. Once you have the car, Rockefeller got so much richer in his retirement from his shares of standard oil, which became, you know, the things that powered us moving around the country and cars than he ever got from caracene. So it was like a paradigm shift could have disrupted and did disrupt the core caracene business, but like the thing that happened at the same time was so much bigger than anything they ever could have imagined. I think that standard was also making some investments into electricity and electrical utilities. I don't know how deep they got into the business. But I'll say it is monopolies, even if you don't trust bus them, are always at risk of being disrupted by a paradigm shift. Totally fair point. Not in this case, though, not in this case. So, you know, it's funny. I always assumed, you know, what I knew of the standard oil story before doing all the research was that it was the 1890 Sherman Antitrust Act that brought down standard oil. It wasn't for another 21 years. Indeed it was. Yes, it was the Sherman Antitrust Act, but it was not for 21 years. So we'll close with the wild story of the Sherman Antitrust Bill. So Ohio, Senator John Sherman, brother of General William Tacumpsa Sherman, the great hero of the Civil War. Wow. Unbelievable. You know how we joke about how there must have been 10 people in Silicon Valley in the 1970s and 1980s? Right. I think there must have been like 10 people in America at this point in time. So Senator John Sherman in 1889, as like the sort of public sentiment is starting to shift against this huge octopus monopoly, proposes an anti-quadent-quote anti-trust bill in the US and the federal Senate. It turns out that just a few years earlier when Sherman was running for office in Ohio, guess who one of his biggest campaign supporters was? Rockefeller? Yes. That would be correct. So this is like, hmm, you're biting the hand that feeds you here. Yeah. So the act does pass, but Sherman makes the political gamble that like the political power and stature that he's going to get from doing this is going to be worth more than the money that he's going to get from Rockefeller and Standard going forward. The act ends up passing in July of 1890, outlawing all trusts and business combinations in the United States of America. That's where this is the key modifier, quote unquote, in restraint of trade, but they don't define what in restraint of trade meets. It's up to some judge to set president and everybody thinks, oh, well, there's no legal precedent for what that means. So that's never really going to become an issue. And in fact, Rockefeller and Standard Oil viewed this as a win. They were like, oh, great. The public is now going to feel like the US government has taken action. They have heard them. They're going to curtail standards power, but they're not actually going to curtail anything that we do. We're going to keep doing exactly what we've been doing. And in fact, when Sherman runs for reelection in Ohio, the very next year in 1891, do you know who once again, one of his biggest donors was? Is it Rockefeller again? It is John D. Rockefeller once again. How funny is that? The act that ends up bringing them down. He is the biggest or one of the biggest donors after the act passes to the senator that introduces it. Huh. Fascinating. So in 1896, Rockefeller is like, well, guess it's been a good run. I'm going to hang it up. I'm going to retire. I'm going to focus on my philanthropy. I'm going to leave one of my lieutenants, John Archbold and my son, John Rockefeller, Jr., who's about to graduate from Brown University. I'm going to leave them in charge. I'm going to go retire to my estate and I'm going to focus on doing good works. But key mistake, he didn't fully leave. No, no, he did not. He's like, well, just in title only, I'll kind of stick around as president, right? Or as chairman. Yeah. Not how the public would view it. They're like, no, your name's still on the door. Oh, he's going to get dragged back to the witness stand in the years to come. So no, no sunset right off for him. Yeah. What a story. As we get into the analysis here, I have a few fun points I want to make. But first, we want to thank the final sponsor of this episode, Nord VPN. So we've talked about Nord on previous episodes. This is one where I think we used to do these community shout out, David. This feels more like a community shout out to me than it does a sponsorship. But of course, Nord is a great company and we do formally work with them as a partner, much like many other YouTubers and podcasters everywhere. So you've probably heard about them in other places, but especially our thanks to Tom Oakman and the rest of the founders there for listening to the show and being a part of the acquired community and seeing and slack. It's just so cool. But for folks who haven't heard on other episodes, this company has a wild story behind it. It's a person person company that serves 15 million people globally that is founded in Lithuania, founded by 2012 by some childhood friends. They haven't taken a dollar of outside funding. It's totally bootstrapped. And so it's this incredible European startup bootstrapping success story to build the huge business that they've built today. So if you're looking for a VPN service, look no further. You can sign up at nordvpn.com slash acquired by clicking the link in the show notes. And you can use a coupon code acquired at checkout our thanks to nordvpn. And you thank you, Nord. They're almost like the pipeline for internet traffic. Built a much less sinister style. David, I listen to these sponsorships just to hear how you steer it into our episode content. It's perfect. So great. Thank you, Tom and everybody in Nord. I want to talk a little bit about like that. We used to do these narrative sections when we do IPOs. I want to talk about like the public sentiment versus Rockefeller's defense. So like the public sentiment here. And when we say public, it's less at this point in history, the actual public and more about their competitors who are sort of making a bigger deal out of this because all the public knows is there's this really big company. They provide things, Cara seen mostly that I use in my life. And it gets to me in a consistent way at a stable price. Like it is good for consumers. Like if you think about the consumer welfare standard of antitrust, this really isn't bad for consumers. It could get there if Stan Royale is the only company and they sort of wheeled that power to raise prices and stuff like that. But at this point, it's really like their competitors hate their guts. And especially anybody who's sort of been coerced to cooperate with them. The railroads, the pipelines, like anyone in their orbit, the retailers, like it sucks for them to. And so you've got this beginnings of like really stirred up public sentiment against this company that's like, by some views, you know, the most evil capitalist structure of all time, Americans ever since we got here from England. And you know, my family immigrated at some point. So I certainly didn't come from England. But ever since the original Anglo people came over from Europe and settled America, there's been this incredible hatred of monopolies. In particular, because our country was founded on equality and people having the right to be free and the free market, like the government was a monopoly in England. And that's what we were running from. Well, and still to this day, there's like huge skepticism amongst Americans of centralized government power. Right. So even there's this interesting like very American stripe that runs through people that is I can't quite put my finger on why, but I don't like big stuff and I don't like concentration of power. And I didn't like it when it was concentrated in a government. And I don't like it now when it's concentrated in the rich people. And that shows up all the way through to today. I mean, that's the defining characteristic of the national conversation now. And of course, Rockefeller's defense to all this is saying, look, social Darwinism is bad. But I think not all of this is part of the real Mattezabout. And that shows up. As you know, I actually really let this call into the technology of your culture. It over here is thinking today that the stock market does come under here, and it doesn't get any drin. But as good people, farmers in the USA said that you don't know the business where there advocate for lions and a lot of things anymore. here. And so the way he sort of makes this argument is it was a cooperative success. It was for the general good. It was our moral imperative. It was downright Christian for me to do this and provide this service. And certainly any of the competitors or suppliers or partners or the like who ended up taking standard oil stock got fabulously wealthy by doing so. Like how could you argue that that was bad for them? He really seems to have deeply believed that this like invisible hand, the Adam Smith concept of, you know, the invisible hand that sort of guides the free market that it kind of just takes too long. And there's a lot of bad stuff that happens along the way. Like academically sure it makes sense that the free market will work itself out. But when you actually look at the businesses today and the people running those businesses today, there's going to be a bunch of hardships and dirt along the way. You might have whole industries that die out because they never sort of reach their full potential. It's not communist and it's not social. It's this interesting like uniquely American viewpoint on actually social Darwinism and free market capitalism is a bad thing. And everybody just eating each other's lunch and eliminating all the profit in every industry and potentially to our own detriment is bad. Turn out even talks about this like in some ways what Rockefeller was trying to do and what standard became shared just as much intellectual grounding as with like Marx and communism as it did with Adam Smith and capitalism. It was this view that like, hey, pure individual competition is not actually like the most ideal status and like some form of collectivism. In this case, collectivism in the form of a company standard oil was the best path. Yeah. And the place where it kind of falls down is where he sort of says, look, if we just knife fight to the death, someone's going to win. And ultimately that one is going to be me because I'm the best at this. And like he's probably right. But this notion of like so therefore everyone should allow me to save them. At truly in like a very evangelical Christian way like I'm going to go and save, you know, and bring them into my business church is very much how he sort of thought about it. The come into the light and embrace the standard oil. Literally the light. I love it. And just dripping with irony in the way that I'm drawing these parallels here. It kind of falls down where like him accelerating the death of all of these businesses and saying it was inevitable and at least they're getting some upside now. The benevolence argument does seem to fall down there a little bit. Perhaps maybe the most blatant example to me is the grocers, right? Like that letter sent out totally writing to grocers saying like if you don't do what we want, we are going to metaphorically burn down your houses like it's unreal. Right. There are places where like it made sense for him to exert his power to reorganize the industry for the betterment of all the producers involved and all the consumers. But those places are far more limited than the number of places where they actually reached and exerted their power. Yep. Side bar on the on the logo because it's so great. We'll see if we can link to it in the show notes. You'll recognize it when you see it. It's this red, white and blue. Oh, it's the amaco logo. Yeah. It's the amaco logo. Yeah. Yeah. Amaco was a california. That's standard of Ohio. Oh, it's California with Chevron. That's the Ohio or New Jersey. I think it was Ohio that became amaco. I could be wrong. I think you're right. I'll fact check that. But yeah, it's this red, white and blue oval with in the middle of the oval, this like gree shan column looking torch, like a lipic torch looking Indiana. Indiana. Oh, interesting. Like a lipic torch looking column with a fire burning on top of it. And interestingly, I think the standard oil of Indiana company adopted a different logo, but then when they turned into amaco, they adopted a something that looks a lot more like the original standard oil logo. Interesting. The other thread I want to talk about here in narratives is Rockefeller and standard oil as an organization. But Rockefeller as a person is really like the prototype of so much of American culture today. Like he was simultaneously viewed as this like, you know, sinister villain. And as this great hero, you know, people hated him, but people wanted to be. Is that a rap lyric? I feel like it must be. Wow. I mean, Jay Z would name, you know, his, his label Rockefeller records. Like, you know, there's a reason for that. But like everything that like I feel like the public feels about, baseless Zuckerberg, Muscle, like everybody, all these billionaires today, like this was the prototype. This was the first time that Americans felt this way. There's this great quote in Titan that says, the general public was of two minds and viewed the new entrepreneurs, which Rockefeller was the foremost as alternatively sinister and heroic by 1888 Rockefeller began to pop up in faunting magazine features about rich Americans. But he was also singled out as a notorious trust king in Joseph Polester's world and other papers. The press kept up an editorial drum beat against standard oil demanding vigorous state and federal antitrust action at the same time that he's in like the equivalent of, you know, like vanity fair as like the new elite. And I think he started embracing that later for a while, his policy was don't talk to the press. And then sort of later started opening up to this idea of like, geez, maybe it's probably a good idea for me to have a positive image out there. Like silence is not doing me any favors. Yeah. All right. Power. Oh, power. Okay. So what are, what are our power categories here? So as Hamilton Halmer would put forth in his wonderful book, seven powers counter positioning scale economies, switching costs, network economies, process power, branding and cornered resource. And what I would put forth here is I think, and I haven't rigorously looked at each one. I think standard oil at various points in its first 20, 25 years of existence exerted every single one of these, but the domineering one, the one that enabled them to do everything that they did with scale economies. No argument from me on scale economies being the most important one here. I mean, literally that was all the machinations with the competitors, with getting the volume in the lakeshore deal, with doing the deals with the railroads. It was all about economies of scale. So for sure. What's your thought on counter positioning? I think in being a pure play refinery that was located in a different location than the, like, is there a reason that no one else should have done an offsite refinery because they had too much vested interest in an onsite refinery? I'm not sure. I'm not sure that it was there was any reason why they couldn't, but I think all the folks who were in the producing world, like the drilling and the crude world, they were just so it was just such a gold rush mentality that like, it was not professionalized, yeah. They were just chasing the quick profits and like they were distracted. They weren't thinking long term, but I don't think there was any reason why they couldn't have set up refining businesses in other locations. The counter positioning feels a little thin. Yeah. All the others that like switching costs for sure, with all the railroad deals and the tank cars and all that network economies, yeah. I mean, they build the retail distribution with standard cans and actually, is that all scale economies though? Is there any network effect here where it's better for one customer that other customers exist? Does anybody ever sort of have a relationship between customers? That's a good question. Maybe not. I mean, network economies were certainly less common in a pre-telephone era. Yeah. Maybe not. Maybe that's more of a stretch. Process power certainly, especially over time, as it got more and more complicated, branding. I mean, they named themselves standard and then they became that. Yep. And then, yeah, I mean, they had lots of cornered resources. Eventually, they cornered the resource on all the crude in the Eastern United States. Because they eventually actually owned all the land rights, right? To actually produce the... Yeah, they did eventually get into exploration and production. I think when it was, you know, it was much later. I want to say it was in the 1880s, 1890s, maybe when big oil deposits started being discovered elsewhere in America. Yeah. And then they got into that in bigger ways. Fascinating. Cool. Moving to playbook. Let's do it. So I have one playbook theme that we didn't touch enough the rest of the episode. And I have sort of a long quote. And this is in particular around the period where there's a lot of fluctuation in prices. There's a race to the bottom. Lots of people are going out of business. And this is sort of Rockefeller talking about how they are going to weather the storm. And, you know, swallow everyone else up. What made an expeditious shutdown of outmoded rivals vital to Rockefeller was that he borrowed heavily to build gigantic plants so that he could drastically slash his unit costs. Even his first partner, Maurice Clark, remembered that the volume of trade was always what he regarded as paramount importance. Early on, Rockefeller realized that the capital intensive refining business in this business sheer size mattered greatly because it translated into economies of scale. Once describing the foundation principle of standard oil, he said it was the theory of the originators, the larger the volume, the larger the opportunities for the economies, and consequently, the better the opportunities for giving the public a cheaper product without the dreadful competition of the late 60s ruining the business. During his career, Rockefeller cut the unit costs of refined oil almost in half and he never deviated from the gospel of industrial efficiency. There's so much tied up here, but one of them is this is kind of the first venture capital business. Like we talked a lot on the TSMC episode about these massive fixed costs. I mean, they're investing $100 million in fabs over the next three years. Then it's all of volume game. How much can you get the plants at full capacity as fast as possible? Because the unit costs can be super small because your variable costs are super low, but it's all about that gigantic capital investment of the fixed costs. I love it. There's the TSMC payoff. I love it. Two hours later. The other thing that I was just thinking the whole time as you were reading that quote was Andreessen, Mark and Andreessen, strength leads to strength. This is the original strength leads to strength business. Totally. This is him justifying rolling up all these other producers where he's basically like, look, the best thing for consumers is to run as much consumer demand through one capital structure as possible. We can just absorb all the fixed costs and then make the variable costs as low as possible. It'd be fun to think about we're on such a kick here with these types of businesses. Is there ever a kind of business or industry where like not scale economies per se, but this broader maximum of strength leads to strength? Is that ever not the case? It's always the case, I think, but it's in varying strokes, especially where industries where there's not fixed costs or where there's low fixed costs. Think about a restaurant business. Assuming that you don't own the building and you're leasing everything and you even leased the equipment, then you're like, geez, what is really the, you know, the catbacks? You're kind of just like at the whim of, can you produce a better product and get a little bit more margin than your, you know, the person down the street? Maybe this is kind of similar to that. Also, what apply to the restaurant business? Like anytime where if you're competing on like the highest end of quality, like I'm thinking like a fine dining restaurant, that's a gateway. Strength might lead to strength in terms of its brand, but if it were to like raise a bunch of capital, expand, go have a bunch more restaurants about. If your value is scarcity, then yeah, it's value destructive. Yeah. Okay, that's a case where strength wouldn't lead to strength in the same way, but so many venture capital businesses and businesses that scale as large as we're talking about in the last few episodes we've been talking about like the largest businesses the world has ever known. Yeah, it's amazing how this dynamic applies. Totally. Well, for grading on this one, listeners, we are going to combine value creation, value capture and grading. We already talked a lot about the component of this value creation section, where how does the value created for the world compared to value destruction? I think we've talked a lot about that in this episode, but we haven't spent a lot of time on like how does the value that state or oil created compared to the value that they captured for themselves, which I think is sort of the interesting one to look at here and like a terrible example is Wikipedia, where there's no company that creates any more value in the world, but captures so little of it, whereas you look at a Google and they create a lot of value, but they're enormously profitable based on it. And so some interesting numbers with state or oil. So we know that they were responsible for this sort of like caracene boom in the United States and the world. And I think let's save the gas car conversation for the next episode. And I absolutely want to have a conversation around climate. And I think we should save that for the next episode too. But in this one, let's just look at the shape of the business by this period of time. So standard oil in the mid 1880s employed 100,000 people, which that's probably the first time a company ever employed 100,000 people governments probably did, but did corporations. Be hard to imagine, especially in a world where there are only 30 million people in the United States. Totally. They had dividends of between 50 and 200% to all shareholders per year, which of course were private shareholders. It was mostly Rockefeller and his partners. I just want to undilide that again, that's falling out of control. That's a very, very profitable business. Oh my god. The amount of capital invested in the business literally anywhere from half to two times that being dividended out to shareholders every single year while you continue investing capital and growing. Ball so hard. They want to find you. And then the last thing I want to throw out is this period between 1890 where we're ending this episode to 1900, they grew tremendously so that annual earnings where we're leaving the story off of somewhere between 10 and 20 million dollars, which inflation adjusted is like a 30x. So it's really like three to 500 million in terms of the amount of earnings profit that they were generating per year in today's dollars. By 1900, they six x'd that. So over a decade, they actually grew tremendously. So it sort of depends whether we're thinking about the business in this 10 to 20 million dollar era or in the like 60 plus million dollar era, you know, by the turn of the century. But I think that gives you a good shape of like this is a business that was spitting off cash. David, the way that you were just describing for us that employed a hundred thousand people that kept America and Europe's lights on. And because it's been so long since this happened, we don't have like SEC filings telling us here's literally the amount of value they were able to capture versus create. But I think the way I would sort of look at this one and talk about this is you can tell from the business practices that we've harped on this entire episode that every time they created value, they looked around to capture every single scrap of it that they possibly could rather than let consumers surplus exist or their competitors participate in the upside that they were creating or partners. Well, and I think even the numbers that we have, scant data such as it is again, wish we had pitch foot back in the day. But the numbers that we have, I think they're also misleading. They do seem a little small. You're like, wait a minute, you guys are talking about how this is a business on the scale that no other business in America has ever been before. But inflation adjusted, even in by 1900, you're talking about a few billion dollars of cash flow that's dwarfed by companies today. But I don't think these numbers tell the whole story because so much of the capital in this business was A being recycled and B not accounted for because of the crazy decentralized trust structure. We'll talk about this much more in the next episode. But when it ultimately gets broken up, you said at the top of the show, the children companies that come out of standard oil, Exxon, mobile, Chevron, the bulk of BP, British petroleum now, like Amco, like all of these companies. It wasn't until the rise of the Fang era in the last 10 to 15 years. Before that, Exxon mobile was by far the largest market cap company in the world. And that was just one of the children that came out of this company. The value that was tied up here was immense. That's a much better way to look at it. You're right. I also think inflation adjusting these things is probably the wrong way to look at it. I was thinking about this more in the context of Rockefeller's personal wealth, which will dissect and depth on the next installment here. But sure, you can inflation adjust wealth and you can inflation adjust profits. But really what you should be doing is looking at them as a percentage of the GDP at that time. Right. And so like, let's look at 1900. So standard oil in 1900 produced $60 million in earnings. And rather than inflation adjusts that, let's look at it relative to the total GDP, which was $24 billion. Okay. So $60 million divided by $24 billion. So 0.25% of the entire country's GDP is standard oil's profits. And I suppose GDP really would be based on revenue. So assuming they had, I don't know, 33% operating margins. I'm kind of pulling on a thin air, but that feels reasonable. Well, I don't know how they're defining profits here. I don't think this is gap account gap accounting doesn't even exist at this point in time. That might be the dividend, the annual dividend. Oh, the earnings being the. Yeah. No, the dividend because the data source we pulled this from had dividends differently. Let's assume that standard oil's revenue represented something like 1% of America's GDP, probably a little bit shy, but something like that, that I think is the right way to frame the amount of money that was flowing through this one company at the time. Wow. That is a significant scale. Yep. So I think the question is that we wanted to ask on grading is like standard oil becoming a monopoly in this way, versus if the industry were to have played out with unfettered individual competition. Which of course is a counterfactual that we have no idea, but how can we get a sense of what the shape of that could have looked like? You know, it's just this really like this makes me think about China. I'm what's going on in China right now. You know, I think the Chinese political economic philosophy is really aligned with the standard oil view of the world, right? Which is that unfettered competition is fine in the early days of an industry. But then you got to come in and you got to like consolidate it. You can consolidate it through the government's hand in the case of China. In this case, it was through Rockefeller's hand. But that's what you need to enter a phase of maturity in an industry. And as we were just saying, you know, Rockefeller's argument is like all of this was good for consumers. This was great for consumers. This was great for America. It's like in the most recent Amazon letter to shareholders when Jeff Bezos calculates the amount of consumer surplus. He's like, if you look how much Amazon shareholders have profited on us existing, Amazon employees have profited and Amazon customers. It's by far the customers who have won. Yes. So good. Bezos student of history. But yeah, Rockefeller's making the same point here. I think it's really interesting. Yeah. Well, again, counterfactual impossible to know, but there's definitely a world where the carousine industry doesn't develop in anywhere near the same scale or impact or size. I'm going to throw this out there and say I think the world would end up no different of a place. I think it would have been totally net even. And the only difference would be that the, you know, Rockefeller family foundation wouldn't be as large. I think give or take a few years. I think the whole thing would have played out pretty similarly. We would have ended up in the same sort of major players in the oil world that we have today. Yep. And maybe all of the standard oil children, the exons, the mobiles, the chevrons, etc. would have developed anyway. That could have been independent Cleveland refiner of growing on their own and not being a part of standard oil and then having to get spun out. That's a really good point. I mean, Rockefeller was a genius in so many levels. He brought the like Morris Chang level of thought and discipline to the business. But eventually other people would have done that too. Yep. I mean, it might have been a little more annoying where like you had to get those two types of carousine sitting next to each other on the shelf and you'd go make sure to buy the compatible one for whatever apparatus lamp you had at home. And that would have been a slight bummer. I don't know. I think Rockefeller made a lot of arguments that served his purpose. And as fun as it is to sort of imagine and sort of theory craft why he was right and how that would have played out. I think net net we would have consumed about the same amount of oil between then and now consumers would have spent about the same amount of money on oil between then and now and we would have about the same number of players we have today. So let's see if I can translate right. It sounds like you're arguing for like a grade of like a sea like a passing grade. Oh, it will. It depends what we're grading like to do in terms of creating a bunch of value and capturing as much as he possibly could a plus right right right in terms of the grade of like the development of this industry in America as it did versus nonstandard oil path. Yeah, I guess that is what I'm arguing. What do you think? I'm not feeling strongly any different way. I think that's a really good argument. You know, it's funny. I feel like if Peter Tiel were here as a guest with us, he would be vehemently arguing the opposite that you know, it's the zero to one's it's the like yes, anybody could have done this. Yes, you know, other people might have but like Rockefeller did it. And in the absence of somebody doing it that it might not have happened. And without all this standardization in the oil industry, then we wouldn't have had all the unbelievable lifestyle upgrades that we've all had over the last 150 years because of the advent of unified oil ecosystem. Yeah, like you like your electric cars and Tesla's in the like well, you know, no caries in back in the day, no gasoline thereafter, you know, we don't advance to the level of technology and development that we're at now. Oh, like if the car was much more inconvenient to drive or that weight in another 30 years to develop, I mean, then like there's a zillion knock on effects of America doesn't innovate in all sorts of other ways. And people don't have a lot of other products that we all take for granted in our lives now. Yep. All right. So I think my answer. I don't have a strong point of view. I think I'm going to go a notch higher than you to a B just because I really do see both sides here once I'd being the argument that like this all would have happened the same way anyway and the other side being yeah, but like you need Rockefeller like no Rockefeller doesn't happen. Mostly though, the other reason I'm going to go with B is I just really love telling the story. Well, that I could tell. I could tell. All right. Carvouts. Carvouts. Let's do it. Two for me both are related. The first more related than the second. The first one is the movie there will be blood with Daniel Day Lewis. If you are jonesing for some good old fashioned, extremely violent early oil days, I think it's like, I mean, I wasn't there. So I have no idea. But unbelievable articulation of what it would be like to go and prospect an oil field and the risks involved in that and the personalities involved in that and the deception and the the way that rogue entrepreneurs were organizing labor and capital to make these things happen. I saw the movie maybe six months ago, but I thought about it so many times, especially in regards to like Titus Phil and some of those in in researching this. And my second is only tangentially related because it is actually about a gold rush, not the oil rush, but the TV show Deadwood with Timothy O'Lephant. I've heard that that's very good. It's excellent. I am one of three seasons in right now. I just finished the first season. It's so good. The characters are so compelling. The acting's great. I actually got tip to it when I was doing the research for the Andrews and Horowitz episode. Mark, I think mentioned that it was his favorite TV show. And so I should check that out if it's Mark, Andrews and favorite TV show. And sure enough, it's awesome. It used to be the Holt and Cache Fire show. Oh, really? Which is also great. Yeah, he talked. I've never seen it, but which I mean, given what we do here, I need to watch it. You do. So go watch Deadwood. It's awesome. Nice. And there will be blood. I've never seen it. I'm like so living under a rock. Oh, man. You need to see that in gangs of New York. Yeah, which I also never see in, huh? Yeah. My car about is completely unrelated. I'm sure I could think of some, the standard oil octopus tentacles reach so far that I probably could think of some connection, but I'm not going to is the secret base YouTube channel, which is part of SB Nation, the sports news website. It's so good. And in particular, I've liked this, this channel. They're work for a long time. And these guys are so, they just do like irreverent histories of like sports moments and teams. In particular, they just did a seven part series on the Atlanta Falcons. It's probably like five or six hours in total. And it's so good. It's so funny and just like so, the whole like premise of the history is they do a lot of great graphics on the channel. So they take a visual representation of the win loss differential for the team. Well, like, you know, if the the horizontal x-axis is a 500 record and then going down below is losing and then going up above is a winning overall record. And basically the whole history of the Atlanta Falcons, their wing as they call it because it's all, you know, losses down into the red almost exactly mirrors the Falcons logo. But if you like tilted up on its side so that the x-axis becomes vertical, it really looks like the Falcons logo. Brutal. It's so funny. But yeah, very, very well done. Highly recommend. Sorry to any Falcons fans out there. Oh, but it's like a love letter to Atlanta and the Falcons. Like, it's so fun. I don't think I made this my carve up, but they did one on the Mariners a year or two ago. That was equally, equally good. We'll link to that one too. All right. Well, listeners, thank you for joining us on part one of this epic journey. We are excited to take you on part two here. We are very interested in your feedback in between episodes. And I think we're going to leave ourselves enough time to make sure we have this out in the wild before recording the next one. So join us in the slack to come talk about it. Acquired.fm slash slack. Email us at acquired FM at gmail.com or tweet us at acquired FM on Twitter. And if you like this, share it with a friend. If you are in the oil and gas industry, we'd love your perspective. I think you know, I'm very interested to learn from folks who this is their bread and butter. And I think with that, thank you to pilot.com, the greatest bookkeeper since John D. Rockefeller himself, Pitchbook and NordVPN and listeners. We'll see you next time. We'll see you next time.