Trust your gut! - Learning from John. D. Rockefeller
And how skunk oil led to incredible profits for him.
Hi there,
Often in life we find ourselves paralyzed by the options in front of us.
However, the only way forward is through betting on yourself, your intuition and belief that you will find a way.
I realized this as I came across the story of John D. Rockefeller and Standard Oil in the 1880's.
Let's get started.
In the 1880s, the crude oil industry was dominated by John D. Rockefeller through his company Standard Oil. To give you a reference, imagine them being like Saudi Aramco.
However, the overall market was suffering as the competition for extraction was fierce. The cost to drill and operate an oil well was low and the potential benefit was unlimited. This led to an excess supply of crude oil, leading to lower oil prices.
Producers could not stockpile the oil and wait for a better price, as the lack of storage facilities at the time meant that everything they extracted had to be sold as soon as possible.
Uncertainty permeated throughout the industry.
Rockefeller and his associates were constantly haunted by two possibilities. Either the oil fields would run dry or there would be too much oil and the price would drop below their costs rendering the business unviable.
The level of panic even led to a suggestion that Standard Oil should exit the business altogether for a more stable venture.
Then in 1885, crude oil deposits were found in Lima, present day Oklahoma, America.
The discovery surprised the oil industry as most of the oil fields in America were found in the state of Pennsylvania.
The problem with Lima Oil was it contained less kerosene than Pennsylvania crude oil and its high sulfur content corroded machinery and gave off a disgusting smell, reducing the products acceptance as a household good.
However, Rockefeller believed that there was value to be unlocked in the Lima oil.
He invested in Lima and bought leases against Standard Oil’s board wishes.
In Rockefeller’s words
“I will build this improvement out of my own funds and underwrite it for two years. At the end of that time if it is a success the company can reimburse me. If it is a failure, I will take the loss.”
He astonished his colleagues by pledging $3 million—about $47 million in 1996 dollars.
Looking at his resolve the board capitulated and agreed to take the gamble. Standard Oil bought oil properties, built tank cars, and constructed pipelines in Lima.
Even though no market yet existed for the “skunk oil,” the trust bought every single barrel offered by producers and by 1888 had over forty million barrels in storage tanks.
Soon Dr. Herman Frasch, a petroleum chemist figured out a way to make the Lima oil commercially viable, by perfecting a method to reduce the sulfur content of the oil.
Rockefeller’s decision to invest was proven right.
Soon the Lima field overtook the waning Pennsylvania industry and became the country’s crude-oil leader in the 1890’s. This ensured that Standard Oil could maintain its global market share and was not forced to rely on Russian producers for oil.
The trust’s swift, complete control of the Lima field gave it unchallenged control of American oil in the 1890s.
For fifteen years, Frasch’s patents furnished dazzling profits for Rockefeller and Standard Oil.
Armed with his profits, Rockefeller went into acquisition mode.
Standard Oil swallowed up Union Oil and three other large production firms. It also took over three hundred thousand acres of Pennsylvania and West Virginia - encompassing whole counties.
By skillfully using his profits to acquire firms, Rockefeller eliminated competition in the production and exploration of oil and created the model for the vertically integrated oil giants that would straddle the globe in the twentieth century.
I came across this story while reading: Titan: The Life of John D. Rockefeller, Sr.
Recently, I also published “A Tale of Recession: 18th Century Mississippi Bubble and the 2022 Economy” on LinkedIn which compares the circumstances that led to the Mississippi Bubble with the conditions that exist in the economy today. I would appreciate you giving it a read and sharing your thoughts in the comments.
I hope you enjoyed this edition of Filtered Kapi. Do let me know if something struck a chord with you.
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