Standard Oil and Yukos in the Context of Early Capitalism in the United States and Russia

Demokratizatsiya, Summer 2008 by Volkov, Vadim

By 1900, industrialization, large corporations' consolidation of economic power, and the formation of new national markets-the forces that determined the lives of human communities-transcended rural community institutions, causing widespread alienation. The incomprehensible methods used by corporations to control the economy, politics perceived as unresponsive to the public interest, and growing class tensions were the main reasons for the Progressive movement's emergence.24 The new urban middle class became the main force demanding that (1) politicians improve their moral standards, (2) government free itself from the influence of special interest groups, and (3) government increase public control over corporations. According to Robert Wiebe, by 1900, "enough bitter conflict and blasted dreams had combined with a vague sense of diminishing bounty to generate a strong demand for order."25 As the federal government began to meet the demands of the Progressive movement, the (re)construction of the state became the central political process.

The State versus Standard Oil

In the 1860s, the American oil sector consisted of a multitude of relatively small independent companies engaged in oil extraction, refining, transportation, and distribution, with rates and prices left to the free play of market forces. The rise of the Standard Oil Company began with several Ohio-based refining companies merging into a partnership (Rockefeller, Andrews, and Flagler) in 1867.26 Three years later, it turned into Standard Oil of Ohio, with capitalization reaching $1 million. The growth of scale, achieved through combination, brought further strategic advantages over competitors, as it allowed market prices of refined products to stabilize by controlling a large proportion of supply and manipulating prices when it was necessary to knock out competitors. To secure its domination, Standard Oil sought to control "bottlenecks," that is, critical transactions. Instead of trying to buy out oil wells, Rockefeller turned to routes and means of transporting crude oil. Controlling transportation addressed several of Rockefeller's problems at once: it allowed him to dictate terms of trade to crude oil suppliers, to eliminate competing refineries, and to create a distribution network, bypassing retailers on the way to consumers.

When Standard Oil began in 1867, it controlled less than 10 percent of the refining business; ten years later, it controlled about 90 percent of it. Transportation was the main instrument of control and later became a monopoly itself. When those opposed to railroad monopolies pressed the federal government to introduce regulations and forbid price discrimination, Standard Oil switched to building oil pipelines (a recent innovation), connecting oil fields, refineries, and distribution infrastructure. The system of oil pipelines gave Standard Oil a complete monopoly over the cheapest form of transportation and price control over crude oil producers, strong leverage over railway companies that did not want pipelines parallel to railways, and domination over consumers who had nowhere else to go.27