The Sherman Antitrust Act In The Us Petroleum Industry

From 1880 onwards, the monopolistic corporate entities known as trusts were generally abhorred by the working class American, as they infringed upon the American ideas of economic success and freedom of competition. Businessmen like John D. Rockefeller, chairman of Standard Oil, widely considered to be the first American trust, became polarizing figures. In response to the monopolistic power achieved by Standard and by other corporations throughout the decade, Congress passed the Sherman Antitrust Act, intended to prevent the decidedly unconstitutional monopolization of industrial markets.

However, in regards to Standard Oil, the Act, being slow in its implementation due to a pro-business court system, and having unclear wordings which rested the responsibility of its enforcement in those same courts, fell far short of its purpose of preventing the monopolization of the petroleum industry. In fact, the Supreme Court decision that found Standard Oil guilty of violating the Sherman Act worked in favor of Standard’s executives in maintaining the monopoly they had established.

Before examining the effectiveness of the Sherman Antitrust Act, it is important to first understand the conditions and practices that allowed Standard Oil to assume its dominant position within the petroleum industry. Founded in Cleveland, Ohio, in 1870, Standard Oil quickly grew to control an enormous share of the domestic petroleum market. The firm started out in the refining sector, as Rockefeller recognized refining as a much stabler endeavor than that of oil welling, which, at the time, was prone to extreme volatility by nature of supply and demand, with the discoveries of new oil wells causing crashes in barrel prices. The anti-competitive practices of which Standard would later be tried upon were soon evident, with the company seizing control by horizontal integration. Though a superior efficiency and use of byproducts helped Standard’s refineries to initially gain a foothold, the firm’s success was more a result of its shrewd and unsavory business practices rather than its technical innovations.

As early as 1872, Standard acquired all but three or four of the thirty five to forty refineries in Cleveland. By the 1880s, Standard controlled over ninety percent of the national refining capacity by way of aggressive acquisitions and the controversial railway rebates to which many attribute the company’s early success. In The Rise and Progress of the Standard Oil Company, Gilbert Holland Montague presents three reasons for Standard’s ability to exact these rebates. By ‘lowering [the] rates at competitive points’, by ‘lowering rates to benefit growing concerns’ and by ‘lowering rates on cheap goods’. Their ability to obtain these rebates largely depended on the understanding of these three factors which determined the rates jointly set, and regularly undercut, by the railways each year. Standard’s location in Cleveland, with its access to the waterways of the Great Lakes made it a more competitive geographical point for railways as they had to compete not only between themselves but also with boating transport interests. By leveraging the early growth of the company that was due to its legitimate means of increased efficiency, and often-falling oil prices, Standard had placed itself in an enviable position from which to collect rebates.

The first legal antitrust action against Standard Oil came from the State of Ohio in the case of U.S v. Standard Oil (an Ohio corporation). Despite the Ohio court ruling against Standard Oil, the company was able to simply create a set of subsidiary companies managed under the roof of the Standard Oil Co. of New Jersey holding company. Legislation concerning holding companies was more lenient in states such as New Jersey and Delaware, and by taking advantage of these policies, Rockefeller and his partners were able to keep a strong control over all of the previous Standard Oil Trust interests. It took a period of nineteen years between the Ohio decision and the Supreme Court decision of Standard Oil Co. of New Jersey v. United States (1911), coupled with President Theodore Roosevelt’s “Square Deal” policies as outlined in his 1904 campaign platform to sway the courts in the opposite direction. Roosevelt initiated a total of forty-four cases against trusts, more than double the three previous administrations total of eighteen, the first seven of eight of which had been lost. Up to that point, previous Supreme Court decisions had been unfavorable to cases under the Sherman Act, such as United States v. E.C. Knight of 1894, which allowed the American Sugar Refining Company to maintain a ninety-eight percent monopoly on the sugar refining industry.

The courts were given a great deal of authoritative say in the matter due to ambiguous or otherwise unclear wordings on which they were required to decide upon the meaning of. The phrases “conspiracy in restraint of trade” and “attempt to monopolize” had no clear legal or objective definitions and therefore allowed for the courts to instead base their decisions off of constitutional sections concerning interstate trade. As the E.C Knight case precedent had been effectively reversed by the time of Standard Oil Co. of New Jersey v. United States, Standard and its trustees could be and were found guilty of “conspiracy in restraint of trade” as monopolizing the means of production was now considered to be in violation of interstate trade law. The Supreme Court’s decision was to dissolve Standard Oil Co. of New Jersey into thirty-four separate and competing companies to prevent further monopolization. The effects showed that this decision had considerable drawbacks as it in many cases did not address subsequent mergers and acquisitions by those companies.

The basis of the Supreme Court’s 1911 decision to dissolve the Standard Oil Co. of New Jersey into its thirty-four subsidiary corporations was to prevent an unfair or monopolistic advantage by way of horizontal but also, by that time, vertical integration. However, the court decision had effectively traded a single firm monopoly for a group of complacent competitors holding a collective monopoly, with each firm seeking to consolidate the others. Mergers as recent as 2005 have resulted in major twenty first century American oil companies such as ExxonMobil, Chevron, (formerly Standard Oil of New York), BP, Marathon, and other large companies stemming from Standard subsidiaries.

Less recently, from the end of the Second World War until the 1970s, the ‘Seven Sisters’, a group comprised of five Standard daughter corporations and two foreign oil companies, Royal Dutch Shell, and British Petroleum, held near complete dominance over the world’s oil markets. Their reign, however, was not subverted by American antitrust law, but rather by the emergence of OPEC (formed 1960), and also the nationalization of oil industries in South America, Europe, and Asia. As for its immediate effects, the dissolution proved especially unsuccessful when it came to the individual wealth of the trustees. The stock of the subsidiary companies doubled, or in the case of Standard of Indiana, tripled, due to additional valuation arising from its patent and rights to royalties from their discovery of thermal cracking, a chemical refining process that increased gasoline yield from 15-18% to around 45% per barrel of crude oil refined. In the days following the split, John D. Rockefeller became the wealthiest man in modern history, with a personal inflation-adjusted wealth of USD (2018) $9 billion by 1912. Compounding these adverse effects was the uneven partitioning of the daughter corporations by their net value.

On its own, Standard Oil of New Jersey, as a subsidiary, was allowed to keep a disproportionate 50% of Standard Oil Co. of New Jersey’s net value. ExxonMobil, formed in 1999, is a product of the two largest 1911 daughter corporations by net value; Standard Oil of New York, and Standard Oil of New Jersey, totalling 59% of the parent corporation’s net value at the time of the dissolution of Standard Oil Co. of New Jersey. The Sherman Antitrust Act had ironically, and somewhat spectacularly, failed again - the very individuals who had been found guilty of conspiracy to monopolize had financially benefited the most from the decision, all without relinquishing their subsidiaries’ monopolies.

Standard Oil’s case was not the only demonstration of the Sherman Act’s failure to prevent the formation of monopolies. Under the Act, mergers occurred in greater numbers than ever before, a testament to its failure: from 1880 until 1902, America saw no less than five thousand smaller businesses arrange themselves into three hundred larger firms. More concerningly to the antitrust proponents of the time, two thirds of these mergers occurred between 1898 and 1902.

It seemed that government regulation in a traditional laissez-faire economy was bound to be met with stiff resistance by businesses. In conclusion, though the Sherman Act had unanimous Congressional support, it suffered from vague wordings rooted in morals immeasurable by a slow moving, pro-business court system. When the Roosevelt administration finally attempted to address the issue, the problem had been allowed to manifest itself for far too long. It is more likely that the conglomerate was simply too big to fail. For these reasons, the Sherman Antitrust Act ultimately failed in preventing the monopolization of the domestic petroleum industry, instead giving rise to a new set of tools for which the infamous ‘robber barons’ could extort the American public.