While his Standard Oil controlled some 90 percent of U.S. refinery capacity, Cornelius Vanderbilt and Tom Scott – owners of, by far, the two largest railroads –agreed to make their biggest client, Rockefeller’s Standard Oil, pay “going rates” on shipping oil by rail.
Previously, Rockefeller had received significantly discounted rates, providing him with a substantial cost advantage over the few rivals that he did have and better margins on the oil that he sold. Rockefeller viewed the rate increase as a declaration of war and vowed to find another way.
Unfortunately for Rockefeller, rail was the only way to get oil from a number of oil fields to his refineries – a classic strategic control point. When it came to getting his oil from point A to B, he was on the outside looking in.
Rockefeller’s solution was to find his own alternative to the strategic control of the railroads – so he built a pipeline! Beginning with a majority stake in Tidewater – the first crude oil trunk line – his companies laid 1.5 miles of pipeline a day, eventually constructing a pipeline that was over 4,000 miles long and connected lucrative oil wells across Ohio and Pennsylvania directly to Standard Oil refineries.
While the project was a massive undertaking that only a Rockefeller, Carnegie or Vanderbilt could have undertaken at the time, it was a huge success. The marginal cost of shipping oil to the refinery was now close to zero, and all margins were internalized to Standard Oil.
Better yet, Rockefeller had won his war against the railroads by making what was once a critical strategic control point into something that was no longer even part of the kerosene production value chain. Brilliant.
The irony is that once the pipeline was constructed, Rockefeller no longer needed the railroads. The railroads, however, increasingly needed his oil as rail volume plummeted at the turn of the century. The railroads had forced Rockefeller into a corner that pushed him to do something – construct a pipeline – which led to their own irrelevance.
Today, the big battle is for control of the Internet. From the debate around Net neutrality to the battle for the “last foot” between cable companies, wireless operators, Google and a whole host of others, we will see the history of Rockefeller, Standard Oil, Vanderbilt and the Industrial Revolution play out all over again.