Business learnings from John D Rockefeller and Standard Oil

John D Rockefeller, arguably the richest man to have ever lived, (if you calculate his present value of then money, he’d be worth more than $300B) was a very shrewd businessman. His choices were very well thought out, long-deliberated and quite unpopular. His choice on entering the oil business and specifically, how he entered it, was quite impressive.

Enter- Oil extraction-

The first trace of oil was found in northwestern Pennsylvania by a few farmers (who thought of it as nuisance and used to plow around it) and was not given much attention to until Edwin Drake extracted rock/crude oil. Soon enough, there were hundreds of entrepreneurs flocking the oil extraction space to get a little share of the big pie. It was termed as the oil rush.

Everybody wanted to be in the extraction business owing to low entry barriers — abundant oil land and inexpensive drilling equipment. John D Rockefeller did not jump in, however. He did fund Drake for a little bit of extraction but saw too much action and volatility in oil (price fluctuations, people losing money in the long term more than gaining) to enter the main-zone of oil extraction.

Enter-Oil refining

John looked at massive oil quantities being wasted because the oil was impure or simply not upto the required safety standards. Most of the crude oil could not be used directly. However, when crude oil was refined into kerosene, it was suddenly a lot more applicable and a lot more valuable-it could be used as an illuminant, cooking fuel and transport fuel among other things. John paid close attention to this and decided to refine oil instead of, extract.

Enter- Standard Oil-

John D went on to build an empire of this choice(of refinning oil) resulting in the birth of Standard Oil — what we now know as one of the biggest companies to have ever existed and the most popular oil refineries of its time. His good relationships with bankers and the wealthy folks of the United States of America allowed him to be continuously supported in a business that was heavy in capital expenditure.

Learnings-

John D Rockefeller decided to stay clear from the overcrowded oil-extraction space and instead trailblazed his way into oil refining- a space that had huge demand but little supply- a space that was not as volatile as the oil extraction business and a space that had continuous economic value.

Somewhere in here is a lesson of being patient, not following the herd and taking the right kind of risks. John realized the value of a space that was not extremely competitive-giving him the freedom to set standards (pun intended), establish ways of working and enjoy all the benefits that come from being a first-mover.

Standard oil had other controversies around fair play and ethics but that is a topic for another post! 🙂

Credits- I was motivated to write about this as I was reading the book Titan by Ron Chernow (John D Rockerfeller’s Biography)