On this day in economic and financial history...
Two of the most notable events in American oil-industry history took place on Jan. 10, and so did one of the biggest mistakes in American corporate history. Let's take a look at these events to see how they've shaped the world today.
Rockefeller's reign begins
John D. Rockefeller's childhood ambitions were to make $100,000 and to live to 100. He almost made it to the latter goal, dying at the age of 97 in 1937. But any student of capitalism can tell you that he vastly exceeded the former goal. In fact, by Jan. 10, 1870, when Rockefeller and five other partners incorporated the Standard Oil Company in Cleveland, Ohio, he was already well past it.
Rockefeller was already a successful businessman when he incorporated Standard Oil, thanks to a lifelong dedication to capitalism that helped him build the partnership of Rockefeller, Andrews & Flagler, which became the largest oil-refining company in the world by 1868. This partnership was absorbed by Standard Oil upon its formation, and Rockefeller took a 30% stake in the new company, while his five other partners took stakes ranging from 10% to 17%. With an initial capitalization of $1 million and a market share of about 10%, Standard Oil had allowed Rockefeller to triple his childhood goal before his 31st birthday. In today's terms, Rockefeller was worth a little more than $5 million -- but this was just a start.
Rockefeller understood very early that the oil industry -- then a patchwork of inefficient, small-scale operators -- would reward those who operated on the largest scales. In 1871, Rockefeller developed the plan that would lead to the Standard Oil Trust in 1882. Vertical integration was the key. Rockefeller and his Standard Oil partners created a sprawling enterprise that stretched from the wells that produced crude oil to the delivery systems that would bring refined product to consumers. By 1880, two years before the trust officially came together, Rockefeller's companies controlled about 90% of the American oil market. In the decade following Standard Oil's founding, the price of kerosene (gasoline was not used before internal-combustion engines became popular) dropped from $0.26 to $0.07 due to Standard Oil's efficiencies of scale. The Standard Oil Trust was worth $70 million when first established, which made Rockefeller's stake worth more than $19 million, or $436 million when adjusted for inflation.
Rockefeller retired from active management in 1897, and the Standard Oil Trust was finally broken in 1911. The resulting companies today hold an aggregate market cap of more than $800 billion, which would make one of the largest corporations in history if combined. ExxonMobil (NYSE:XOM) is the most direct descendant of Standard Oil; it was originally Standard Oil of New Jersey, the largest and most influential of the "Baby Standards." Chevron (NYSE:CVX) also holds close ties to Standard Oil, but its earliest predecessor was acquired by the trust in 1900. Both companies have been important parts of the Dow Jones Industrial Average (DJINDICES:^DJI) for decades. Both have been members since 1930, except during a period from 1999 to 2008 when Chevron was replaced by one of the dot-com era's largest tech companies -- a big mistake for the Dow.
Rockefeller continued to amass greater wealth after his retirement, thanks to many smart investments, and the continued growth of the Baby Standards after the breakup. By 1916, he became the world's first billionaire. Although he was known for distributing huge amounts of his wealth to charitable causes, Rockefeller still died in 1937 with an estimated $1.4 billion to his name, which was 1.5% of America's GDP that year. In comparison, former Microsoft (NASDAQ:MSFT) CEO Bill Gates' peak fortune of $82 billion was only worth about 0.66% of American GDP in 2006. Adjusted for inflation, Rockefeller's peak net worth would be somewhere north of $300 billion.
It's a gusher!
Rockefeller built an empire in a world without automobiles, finding profit by selling kerosene and lamp oil. By the turn of the century, the internal-combustion engine was generating demand for a new product: gasoline. This new source of demand required a greater source of supply, but none of Standard Oil's explorations could yield the quantities necessary to fuel a growing automotive industry. If the company had looked to the Lone Star State, it may have found what it needed, because on Jan. 10, 1901, the modern American oil industry began on Spindletop Hill, south of Beaumont, Texas.
Enterprising explorers had sought oil under the salt domes of Spindletop since 1893, but multiple efforts failed to drill deep enough to tap the vast oil deposits below. The drilling team that broke through was assembled in late 1900, with salt-dome expert Anthony Lucas and experienced drillers Al and Curt Hamill leading the effort. The crew worked from October to January, drilling down more than 1,100 feet into a high-pressure reservoir. The drill bit broke through on Jan. 10, and within minutes, tons of drilling pipe exploded out of the ground, followed by a massive geyser of oil that shot more than 150 feet into the air.
It took the team nine days to bring the gusher under control, and during this time it spilled an estimated 900,000 barrels onto the landscape. By the end of the year, $235 million in oil-related investment capital flowed into Texas -- about 1% of the entire national GDP in 1901. By the end of 1902, Texas' annual oil production had risen from 836,000 barrels to 17.5 million barrels, and America's annual crude-oil production soared from 57 million barrels in 1899 to 126 million barrels five years after the Spindletop discovery. Several instances of declining yield on the oilfield were quickly overcome with better technology, and by 1927, Spindletop reached a record annual yield of 21 million barrels.
Texaco, which is today part of Chevron, was formed to take advantage of the Spindletop-fueled Texas oil boom, and other major oil companies flocked to the state over the years. Today, Houston -- the closest major city to Beaumont and Spindletop -- hosts a number of major oil companies, including ConocoPhillips (NYSE:COP) and Marathon Oil (NYSE:MRO), as well as most major oil-field services companies, including Halliburton (NYSE:HAL), Baker Hughes (NYSE:BHI), and National Oilwell Varco (NYSE:NOV). Although Spindletop is no longer the producer it once was, more than 153 million barrels of oil have been extracted from the salt domes south of Beaumont since that first gusher in 1901. Texas itself continues to supply the United States with 1.4 million barrels of oil every day.
The worst deal ever made?
On Jan. 10, 2000, near the absolute peak of the dot-com boom, America Online (UNKNOWN:AOL.DL) announced its intentions to acquire Time Warner (NYSE:TWX.DL) in an all-stock deal then valued at more than $160 billion, which would create a combined company valued at $350 billion.
At the time, it was heralded as a transformative moment. Raymond James analyst Phil Leigh called it "probably the most significant development in the Internet business world to date." AOL co-founder Steve Case said of the buyout: "This is a historic moment in which new media has truly come of age." The combined company was to have more than 100 million subscribers between AOL's dial-up customers and Time Warner's cable and magazine operations. Time Warner CEO Gerald Levin said, "This strategic combination with AOL accelerates the digital transformation of Time Warner by giving our creative and content business the widest possible canvas."
The deal did turn out to be transformative -- but not in the way everyone had hoped. The Nasdaq (NASDAQINDEX:^IXIC) peaked two months later, and by the time the two companies combined in January 2001, their combined market cap had fallen from the original estimate of $350 billion to less than $200 billion. The new company slid fast throughout the tail end of the dot-com bust and afterward before cratering at a market cap of less than $20 billion during the lows of 2009.
AOL executives and Time Warner executives often found themselves at cross purposes, and it became an inside joke among other content companies that it was easier to get a distribution deal with AOL if you weren't part of Time Warner. The two smashed-together companies never hit on a common strategic goal, and AOL's subsequent subscriber implosion in the broadband era made it even more of a pariah in Time Warner headquarters. AOL was spun off at the end of 2009. Its present market cap of $2.5 billion is 99% smaller than the original combined value estimate for AOL Time Warner. The current combined market caps of AOL and Time Warner remain 71% below their post-merger peak, and neither company has a clear path back to that height, short of another massive, marketwide speculative bubble.
The Motley Fool recommends Chevron, Halliburton Company, and National Oilwell Varco. The Motley Fool owns shares of ExxonMobil, Halliburton Company, and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.