The following is Methods of Prosperity newsletter number 10. It was originally deployed August 24, 2023. As of May 2, 2024, original subscribers have received up to issue number 46.
Last week on Methods of Prosperity, Cornelius Vanderbilt began his entrepreneurial journey at age 16, when he borrowed $100 from his mother to buy his first boat. The transport service he created between Staten Island and Manhattan turned that $100 into a 10X ROI for his mother in one year. Vanderbilt’s business acumen continued as he entered the steamboat and railroad industries. He used aggressive pricing strategies to outcompete rivals, amassing a fortune of $500,000 by 1834. Vanderbilt's influence expanded as he controlled much of the U.S. railroad industry.
“There’s nothing wrong with being greedy. Greed is a good thing. Anyone can be greedy. From greed there is hope.”
These words told to John D. Rockefeller by his teacher in business school changed his life.
Part 10. John D. Rockefeller.
TL;DR
In 1859, a new technology was emerging. Candles and whale oil had been the norm as far as sources of light during this era. Suddenly these old amenities were being replaced. Kerosene lamps, derived from refined crude oil was trending. The Pennsylvania oil rush kicked off. Seizing the opportunity, a young entrepreneur named John D. Rockefeller borrowed at least $1,000 to start a small oil refinery amid production inefficiencies in Cleveland, Ohio. His venture required significant capital and a deal with distribution magnate Cornelius Vanderbilt, who, recognizing the burgeoning oil industry’s potential, partnered with Rockefeller for oil distribution. Vanderbilt wanted in on this oil rush, and he needed Rockefeller. Their partnership initiated with an exclusive deal. For supply to meet demand, Vanderbilt had to over-pay. That meant Rockefeller was under pressure to over-deliver.
Rockefeller’s strategy focused on exploiting market inefficiencies, aggressively buying out competitors to consolidate control under Standard Oil, effectively creating the first U.S. monopoly in the oil sector. His dominance reached new heights when he switched from relying on Vanderbilt’s railroads to laying down pipelines instead. This move circumvented traditional transport methods. Trust me bro, it was a significant economic shift. The resulting railroad bubble burst. This led to America’s first national economic depression in 1873. America was down bad. Soon, the growing wealth gap was evident as Rockefeller continued to expand his empire.
No empire is built without opposition. Vanderbilt’s competition, Tom Scott and Andrew Carnegie made a deal with Rockefeller to distribute his oil. This made Vanderbilt salty, and he therefore sought revenge. Rockefeller managed to outmaneuver his adversaries, further securing his high status. And that’s how he became America’s wealthiest individual. Long story short, Rockefeller crushed it in the oil industry. He would continue to slay, becoming an epic Capitalist.
Key lessons:
Undercut your competition when you can drive prices down below their margins. Then grow your empire by absorbing them when they go bankrupt.
Advance by increasing your prices to reach demand, and lower them to create a loss leader.
During times of fear and panic, advance to acquire assets at a discount.
Leverage is fundamental to the accumulation of wealth.
When demand is great enough, cut supply.
Take advantage of market inefficiencies.
There’s more than one way to skin a cat.
Use debt to grow your enterprise.
Expect to have haters.
The Pennsylvania oil rush began in 1859. Keep in mind that until then, America relied on candles and whale oil for lighting until the innovation of kerosene lamps. Kerosene is made from refined crude oil. At the time, the inefficiency to produce kerosene presented an opportunity. Once again, leveraged debt was the only way to capitalize on an opportunity this big. Recognizing the opportunity, the young entrepreneur borrowed at least $1,000 to start a small oil refinery in Cleveland, Ohio. While the opportunity was clear, Rockefeller would need more than capital. For an endeavor of this magnitude, he would be forced to over-promise and over-deliver to the only magnate who had control of distribution.
Cornelius Vanderbilt made a deal with John D. Rockefeller because he saw the potential for growth in the oil industry. Vanderbilt made his fortune in the shipping and railroad industries, but the market was changing. Oil was the next frontier. Vanderbilt was impressed by Rockefeller’s ideas, and he saw the potential for a mutually beneficial partnership. He knew that, in order to keep his empire expanding, he needed to start distributing refined oil to fulfill the growing demand. Rockefeller was the best man for the job, and he had leverage. If Vanderbilt didn’t ship his oil, Vanderbilt would lose the opportunity to advance. Rockefeller was willing to do an exclusive deal at $1.65 per barrel, which was one third more than Vanderbilt intended to pay.
That would put Rockefeller substantially in the black, but he was the little guy. Vanderbilt was a giant. After Vanderbilt pushed back, Rockefeller stuck to his guns, promising to fill all of Vanderbilt’s trains to capacity with his oil. Too good of a prospect to refuse, Vanderbilt leaned in. If Rockefeller could deliver, Vanderbilt’s trains would be integral to the emerging oil market. Closing this deal meant Rockefeller had to fulfill Vanderbilt’s trains with sixty barrels of oil per day – a tall order that young Rockefeller wasn’t actually ready for. In reality, he had no way to produce that much kerosene. The fact that his small enterprise could only produce half the amount of oil promised to Vanderbilt meant that he was just getting started.
“God gave me money.”
– John D. Rockefeller
A deeply pious and stoic man, John D. Rockefeller believed it was his divine calling to get rich. A baptist preacher inspired him as a boy to make as much money as he could so he could give it away.
Exploiting inefficiencies in the market was Rockefeller’s superpower. His modus operandi was to buy out as many other oil refineries as he could and often used hardball tactics to achieve this goal. Rockefeller bought out other oil refineries and integrated them into Standard Oil vertically and horizontally. He would offer his competition cash or stock in Standard Oil in exchange for their plants and talent, absorbing them into his growing empire. When other oil companies sold out to Standard Oil, Rockefeller would shut down the inefficient ones and utilize the assets and resources of the more efficient ones.
Another inefficiency was price. One way to increase profit is to cut expenses. Vanderbilt was his first deal, but now Rockefeller gained more leverage by creating a monopoly. Why not get cheaper distribution from Vanderbilt’s competitor?
At some point, John D. Rockefeller switched distributors from Cornelius Vanderbilt to Tom Scott and Scott’s business partner Andrew Carnegie. In retaliation, Vanderbilt formed an alliance with Tom Scott to try and take back power and stop Rockefeller’s monopoly. At the age of 33, Rockefeller was the most powerful business man in the United States of America. His company, Standard Oil, is the first monopoly. For the first time in American history, one man owned 90 percent of the oil supply and was playing the railroads against each other. Vanderbilt, Scott and Carnegie threatened to stop transporting Rockefeller’s oil. This would present a problem which, once again, became an opportunity for Rockefeller. He built a pipeline in 1878 as a cost-effective method of avoiding railroad transport, cutting them off for good.
Understand that this move gave Rockefeller monumental leverage. The ramifications of which would send the U.S. economy into a tailspin. With no more oil to transport, the railroads struggled to find enough passengers and cargo to meet the supply of over extended tracks across the country. This was a market bubble. Investors panicked and sold. Stocks plummeted. The market rapidly collapsed.
By 1873, the railroad bubble shut down the stock market. With one third of railroad companies now bankrupt, America encounters the first national economic depression in its short history. Here was a foreshadowing of the growing wealth gap in the United States, where the populace suffered while “big oil” continued to expand. Standard Oil absorbed each and every competitor as they went down. Rockefeller bought out bankrupt oil companies for next to nothing, expanding his monopoly. By the end of the depression, Rockefeller gained the largest corporate empire in America.
Cornelius Vanderbilt died at the age of 82. Tom Scott and Andrew Carnegie still provided trains to transport Rockefeller oil through Pittsburg, beyond the extent of Rockefeller’s pipeline. Knowing the railroads won’t last, and Rockefeller didn’t yet have a monopoly on American pipelines, Scott started building his own pipeline to compete with Rockefeller. However, letting Scott hold his oil distribution in Pittsburg hostage wasn’t something Rockefeller was going to allow. Instead, he shut down his own refineries. While shutting down his Pittsburg refineries cost Standard Oil a fortune in lost revenue, the long term gain of eliminating his competition was worth the expense. Without Rockefeller oil, Scott loses nearly half of his business, forcing him to lay off tens of thousands of workers and drastically cut wages. The workers rioted, turning violent overnight. They set fire to Scott’s train yards, destroying 39 buildings and over 1,200 train cars. Tom Scott’s railroad company was over.
John D. Rockefeller replaced Cornelius Vanderbilt as the richest man in America. His net worth is at this point over $150 million. By today’s standards that equates to at least $225 billion. He controlled nearly all of America’s oil. When you are at that level, someone will try to take you down. John D. Rockefeller was about to encounter his worst enemy.
Stay tuned for next week!
I like you,
– Sean Allen Fenn
