The Rise of Big Oil

On this day in economic and financial history...

At the end of 1881, Standard Oil was only one of John D. Rockefeller's many companies in the growing oil industry. On Jan. 2, 1882, everything became part of the Standard Oil Trust, which would become a defining symbol of American capitalism and was almost certainly the most influential oil company in history.

The disparate companies aggregated themselves into Standard Oil through an innovative legal tactic that (for a while) allowed the company's trustees to evade states that sought to limit the scale of businesses. Stockholders of subsidiaries transferred their shares to the nine trustees of Standard Oil in exchange for a weighted slice of the trust's earnings. The trust controlled 14,000 miles of underground oil pipelines and every oil tanker riding on the Pennsylvania Railroad. It was a good start.

By 1890 Standard Oil's assets were valued at more than $100 million. The federal government did not take long to push back against Standard Oil's dominance. President Benjamin Harrison signed the Sherman Antitrust Act into law that same year. The state of Ohio aggressively fought Standard Oil's monopolistic grip, and the state's Supreme Court ordered the trust to dissolve in 1892. However, the same legal brilliance that created the trust structure managed to maintain it until 1911 by taking advantage of New Jersey's more permissive corporate laws.

Rockefeller was unofficially retired by 1897, but he maintained his stake in Standard Oil and the title (though not the duties) of president of the company. By 1910, Standard Oil's valuation was nearing $600 million. The federal government filed an antitrust suit against the company that year, and in 1911, the Standard Oil Trust was broken.

At the time of its breakup, Standard Oil was worth 1.7% of the national GDP. The "Baby Standards," far from being reduced in stature, grew at an even faster rate in the years that followed. The larger post-breakup companies would form the core of the booming American oil industry, and the company's legacy ranks it as one of the largest enterprises of all time:

  • Standard Oil of New Jersey became Exxon and is now part of ExxonMobil (NYSE: XOM  ) .
  • Standard Oil of New York merged with Vacuum Oil and became Mobil.
  • Standard Oil of California became Chevron (NYSE: CVX  ) .
  • Standard Oil of Indiana became Amoco and was acquired by BP (NYSE: BP  ) .
  • Continental Oil became Conoco, which merged into ConocoPhillips (NYSE: COP  ) .
  • The Ohio Oil Company became Marathon Oil (NYSE: MRO  ) .

Both Standard Oil of New Jersey and Standard Oil of California became part of the Dow Jones Industrial Average (DJINDICES: ^DJI  ) following the breakup, with New Jersey joining in 1928 and California following in 1930. As ExxonMobil and Chevron, the two comprise 11.4% of the index's valuation, making the price of oil especially important to the Dow. Standard Oil's successor companies, all told, add up to more than $800 billion in aggregate market value.

What happens when no one wants to trade?
The first trading session of 1915 was met with the longest yawn in market history. On Jan. 2, 1915, a shortened session saw only 23,500 shares change hands -- the lowest volume of the 20th century. This "record-breaking dullness," as the Chicago Daily Tribune put it, occurred less than a month after stocks were again allowed to trade following an extended shutdown due to World War I.

Those who were willing to stay invested reaped incredible rewards. The Dow gained 82% over the course of 1915, which is far and away the largest annual improvement in its history.

Luddites and the law
On Jan. 2, 1813, a Special Commission opened in York, England, to try the imprisoned Luddites. For the past year, the Luddite movement had raged throughout England, smashing the automated looms that threatened their livelihoods as textile weavers. Luddites briefly challenged the British Army, but by the end of 1812 the movement had been essentially crushed.

The Special Commission made no effort toward impartiality. The trial was a show trial, not dissimilar to the witch trials of centuries earlier. Many Luddites were hanged within days, and others were released only due to a complete lack of evidence. The British Parliament quickly made industrial sabotage a capital offense in the aftermath of the trials. The Luddite movement, after the mass public executions, was smashed every bit as thoroughly as the looms it had once attempted to eradicate.

In recent years, "Luddite" has become synonymous with anti-technology crusaders. Ted Kaczynski, the Unabomber, is one prominent anti-technologist in the Luddite vein. The word is often bandied about in a derogatory fashion -- particularly in reference to the Luddite fallacy, which has thus far disproven such crusaders as new jobs are made in unexpected places when automation displaces established professions. This fallacy has come under intense criticism in recent years as commentators (including yours truly) note that increasingly complex and physically demanding tasks are being taken over by automation.

The only cure for high oil prices
In 1882, a barrel of oil sold for about $0.60 -- less than $14 when adjusted for inflation. And on Jan. 2, 2008, crude-oil futures broke through the triple-digit ceiling for the first time in history. The New York Times writes of the rapidly rising price of oil on that day:

The spike in crude prices of $3.64 for the day reflected deeper worldwide trends, including the surge in energy demand from China, India and the oil-producing countries themselves. ... The immediate impetus for the price rise appeared to come from an attack by rebels in the Nigerian oil center of Port Harcourt and rough weather in the Gulf of Mexico that slowed Mexican oil exports.

Oil prices continued to rise through much of 2008 before peaking near $150 per barrel at midyear. This represented a doubling of oil prices from the prior year, and such heights proved unsustainable as the global economy began to collapse under the weight of trillions of dollars' worth of bad financial bets. Several noted financial publications, including The Fiscal Times and The Wall Street Journal, have pointed to this price shock as a major cause of the 2008 recession, as has James Hamilton of the National Bureau of Economic Research, who writes:

All but one of the 11 postwar recessions were associated with an increase in the price of oil, the single exception being the recession of 1960. Likewise, all but one of the 12 oil price episodes ... were accompanied by U.S. recessions, the single exception being the 2003 oil price increase associated with the Venezuelan unrest and second Persian Gulf War.

These alarms were sounded in 2011 as oil again crested the $100 level. However, fear and warnings of another oil-shock recession have yet to materialize, as oil prices have hovered near that level ever since. This may well be tamping down economic recovery efforts, but it has yet to tip the world back into recession.

Oil prices near $100 per barrel seem to be a fact of life. If that's to be the case, it would be foolish (lowercase "F") not to capitalize on this new economic reality. That's why The Motley Fool's free report on "Three Stocks for $100 Oil" is so popular. Want to learn more about these three stocks and their potential for your portfolio? Click here to access our report now, at no cost.


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