Wednesday, March 21, 2012
Rethinking the Economic Basis of the Standard Oil Refining Monopoly: Dominance Against Competing Cartels
Posted by D. Daniel Sokol
George L. Priest, Yale University - Law School has a very interesting paper in Rethinking the Economic Basis of the Standard Oil Refining Monopoly: Dominance Against Competing Cartels.
ABSTRACT: The success of the Standard Oil monopoly is not well understood. Standard Oil first developed a monopoly over the refining of crude oil, though later extended its control to gathering pipelines, later still to trunk pipelines (from the western Oil Regions to East Coast ports) and, even later, expanded operations to include oil production (drilling) and retail sales at the time the Supreme Court ordered its dissolution 100 years ago, in 1911.
Though there are several journalistic exposes of Standard Oil - Henry Demerest Lloyd and Ida Tarbell - as well as business histories - none very explanatory - the currently dominant theory of Standard Oil’s success is by Elizabeth Granitz and Benjamin Klein who assert that Standard Oil was chosen by oil shippers, the railroads, to police a railroad cartel. According to Granitz and Klein, the railroads split with Standard Oil the profits from cartelization of the crude and refined oil industry.
This paper challenges that explanation, claiming that there were attempts to cartelize at all levels of the oil industry - producers, gathering pipelines, refiners, and the railroads. There are good economic reasons that explain why Standard Oil, a refiner and at the remote western location of Cleveland, secured a monopoly as against the producers and the railroads.