From Austin Vernon's substack, October 5, 2025:
Many tech industry followers will recognize the playbook.
The Standard Oil Story?
I didn’t realize that the more popular texts didn’t cover the details of Standard Oil’s genesis. That piqued my curiosity, given my interest in oil and energy-related topics. Almost all commentary seemed to focus on railroad deals or other minutiae instead of what my background suggests should have been the key: returns to scale and capital efficiency.Thankfully, my research assistant, GPT-5, found some excerpts of the excellent book “John D. Rockefeller: The Cleveland Years” by Grace Goulder, which I bought and read. Goulder is an interesting character, having written about local Ohio history most of her life. After her husband died, she took on the project of organizing the Western Reserve Historical Society’s files on Rockefeller (he had been a vice president of the society for “decades”). The book was the result. Goulder’s tone is much more neutral and friendly than many on the subject.
The book provides enough details to piece together how the early Standard Oil business model worked. The reality seems different than many popular accounts and is much more logically consistent.
The Backdrop
Colonel Drake and his outfit discovered “rock” oil in Western Pennsylvania in 1859. The find brought great excitement and speculation since oils and fats were in chronically short supply. Fancier towns might have gas street lights. Rich folk would use whale oil, but most people went without, had dirtier burning oil, or used candles.Cleveland was one of the closest transportation hubs to the Titusville find. Some refining of substances like coal or lard to produce lamp oil or other products was already happening in Cleveland in 1859, mostly by British immigrants (one named Andrews became Standard Oil’s lead technical mind). Several of these men were the first to distill kerosene from a Titusville sample. Small refineries sprang up in Cleveland, and in 1863, the business picked up after an already planned railroad connected the oil fields to the city and the city to coastal markets.
It is difficult to emphasize how nascent the industry was. Refining methods were so inefficient in the mid-1860s that a barrel of oil (42 gallons) sold for almost the same price as a gallon of refined kerosene. Today, the price ratio of refined products to crude oil is ~1.25x instead of 42x.
These factors set the stage for Cleveland to be a refining (and technology) boomtown.
Rockefeller’s Entry
Rockefeller’s business career started in 1855 at the age of 16 as a clerk/bookkeeper for a local trading house. His responsibilities and pay expanded quickly. Two years later, he used his savings and a loan from his father to start his own trading firm with a partner named Clark, specializing in items like meat and grain. Business was good, especially with the stimulus of wartime orders. Rockefeller was already fairly rich by the time he became interested in oil in 1863.Rockefeller’s first experience with oil was handling its shipment through his trading company. Andrews, one of the chemists who had first distilled kerosene from the oil, constantly badgered Rockefeller and Clark about his ideas for producing refined products. Eventually, Rockefeller and Clark decided there was a business opportunity, and they all started a refinery in 1863.
The Human Capital Interlude
A continuous theme throughout the book is “game recognize game” moments. Why was Rockefeller able to get a loan at the most prestigious bank for his trading house when he was barely 20? Why was the best chemist, Andrews, pursuing Rockefeller instead of other businessmen? And on and on later in his career.Cleveland was a small city compared to today. John D had a reputation as a hard worker, an excellent manager who minded every penny, and as a devout Christian who was an effective leader in his church. All of his connections knew John from business, church, or membership in other organizations (like the YMCA). He and the best people gravitated towards each other and were happy to do business together.
Outgrowing the First Partnership
Rockefeller, Clark, Clark’s brothers, and Andrews quickly had the refinery humming along. Andrews kept improving the process to increase the yield and quality of kerosene (the most valuable component; one barrel yielded roughly half a barrel of kerosene after the improvements). Rockefeller led a program to reduce costs elsewhere by finding markets for non-kerosene byproducts, utilizing waste streams, bringing on a full-time plumber, buying an oak forest (for barrels), and buying a barrel-making shop.Rockefeller wanted to continue to grow, borrowing heavily to do so. Clark’s brothers did not share his enthusiasm, and the partnership became fraught. John and Andrews agreed that they would stay partners in a new venture if this one failed, and after a tense meeting, everyone agreed the partnership should be dissolved (though the Clarks were under the assumption that Andrews would follow them). The business went to auction in early 1865, with Rockefeller winning the bid over Clark.
Rockefeller and Andrews’ refinery, known as Excelsior Works, was considered the best refinery (out of 30 or so in the city), even with more competitors joining every day.
Refining is a Scale Business
Scale is helpful for most businesses, but refining might be one of the most extreme examples. A typical rule of thumb in chemical engineering is that capital costs increase sublinearly with capacity, usually by (capacity ratio)^0.6. A plant with double the output is only 50% more expensive to build, and operating costs tend to follow similar trends. The reason behind this is that chemical plants and refineries are agglomerations of steel vessels and pipes. Vessel and pipe volume increases faster than surface area as size increases, decreasing steel and fabrication costs per unit of volume. Many items, like controls or operators, cost the same for a large component as they do for a small one.Rapidly expanding refining capacity means crashing costs. The biggest, most efficient refineries had enormous advantages over smaller, less sophisticated ones, and competitors would quickly swamp anyone sitting still. Standard Oil and its predecessor firms increased production ~20x between 1865 and the end of 1872, meaning their costs could have fallen more than 85%. At that point, they were the largest refiner in the world with a double-digit share of capacity, and it was their game to lose. If we understand this short period, then we know how the company eventually won....
....MUCH MORE
Previously from Austin Vernon's substack: