As a result, the incentive for many powerful men in business and industry was to try and crush competition by forming monopolies (aka Combinations). Oil was the most volatile of the major industries; being in the petroleum business was a nerve-wracking and unpredictable venture. Low kerosene prices were a boon to consumers, but they were a bane, especially to refiners, in terms of profit margin.
(Pictured: A small part of Oil Creek in Northwest Pennsylvania in the 1860s)
On 10 January 1870, Standard Oil was created, with Rockefeller as President, and Henry Flagler as Secretary and Treasurer (a third partner, Samuel Andrews, was Vice-President). The name of the company referred to their "standard" uniform quality of kerosene which had no impurities of note compared to the competition. Standard Oil already controlled 10% of America's refining capacity, and also had a barrel-making factory, warehouses, shipping facilities, and a fleet of railroad tank cars. Rockefeller's goal was to simply refine ALL of America's oil.
Rockefeller and Flagler refused a salary; their profit was to be solely from the appreciation of Standard Oil's shares and dividends (Rockefeller made sure that he was the largest single shareholder, holding about twice the shares of stock to Flagler and Andrews). Rich investors did not bang on Standard Oil's door, in that it was a very unstable time for new ventures, and the oil industry was too unpredictable for most that were looking to invest. In order to prove the naysayers wrong, Rockefeller paid out 105% on the company's dividends, which was absolutely unheard of in those days in an uncertain economic landscape.
To "save" the industry from itself, Rockefeller covertly acquired New York's premier oil purchasing company in 1871 (it also had a refinery). This acquisition gave Rockefeller a sophisticated purchasing agency at the perfect time. Publicly, the firm looked like it stood in opposition to Standard Oil, but in reality, it was Rockefeller's pawn. On 1 January 1872, Standard Oil expanded it capital from $1m to $3.5m in just a couple of days. Among the new shareholders were the luminaries of Cleveland banking, with prominent railroad men as well. Also, on 1 January, Standard Oil's Executive Committee decided to purchase "certain refining properties" in Cleveland and elsewhere. It was the start of what historians call the “Cleveland Massacre”.
One might ask - how did the railroads benefit from the from this agreement with Rockefeller and the SIC? Rockefeller helped the railroads arbitrate their vicious rate disputes; Standard Oil also guaranteed that the three railroads had specific percentages of the SIC oil shipments (PA 45%; NY Central and Erie 27.5% each) . . . Rockefeller had become the railroads "Oil Umpire". The railroads were able to run lines of cars at full capacity while making far-fewer stops, which significantly increased their profit margins. Also, the railroads were fully aware that Rockefeller had accumulated MANY oil tank cars; in short, the three railroads badly needed John D. Rockefeller.
Both refiners and railroads were struggling with excess capacity and suicidal price wars. Rockefeller figured out that he could fix the refiners' problems and those of the railroads in one fell swoop. Rockefeller knew exactly what he wanted, and he had a knack of knowing what the OTHER party wanted as well. Rockefeller saw the whole picture, and figured out how to save the railroads from themselves, and create greater wealth and power for himself.
The three railroads (that controlled the rails from NYC to Cleveland) raised the freight rates by 50% for all refiners that weren't part of the SIC (to Rockefeller and the railroads, "Fair Warning" had been given to all refiners). Those in the SIC would receive 50% rebates off crude/refined oil shipments. Also, those in the SIC would receive "Drawbacks", which were further rebates given SIC members for every barrel shipped by non-member refiners (Rockefeller felt totally justified in receiving drawbacks, in that Standard Oil was the de facto warehouse for the oil that was to be shipped . . . he believed he should receive payment for services rendered).
The railroads also gave members of the SIC inside information on oil shipments from the independent (non-member) refiners, which meant that the SIC could under-sell the independents. The drawbacks (and the other features of the SIC) were an instrument of competitive cruelty, which was unparalleled in US History up to that point; to many Americans, it was the grandest scheme of collusion and knavery they had ever seen.
Ida Tarbell was 14 years old during this scurrilous hoo-haw, and the controversy was a negative frozen moment in her life (her father was one of the independent refiners). Eventually, she would write The History of the Standard Oil Company, which appeared in installments in McClure's Magazine from 1902 - 1904 (to Ida, Rockefeller didn't "play fair").
Rockefeller always believed that his enemies were axiomatically wrong, and he was right; not just right, but Righteous. To Rockefeller, the furor over the SIC confirmed his view that the oil industry needed to be brought under control . . . his control. Rockefeller's silence during the uproar confirmed, to the public, that he was not only arrogant, but guilty. Rockefeller told the few that were close to him (e.g. Henry Flagler), "You can abuse me, you can strike me, so long as you let me have my way".
The fatal mistake that Rockefeller and the SIC made was omitting refiners in the state of New York; almost immediately the NY refiners joined their Oil Creek brethren in opposition to the SIC. On 25 March 1872, the three railroads, under severe pressure from the PPU and the general public, agreed to cancel their contract with the South Improvement Company. The SIC didn't violate any laws of the day, but it did violate a collective sense of what was considered "Fair Play".
On 8 April 1872, Rockefeller surrendered to the obvious, instructing those in the SIC that all contracts with the three railroads were null and void. Rockefeller tried to explain (through intermediaries, since he refused direct contact w/ most anyone) that there was no conspiracy against the refiners . . . the conspiracy was against the consumers. Rockefeller claimed that he wanted a "United Front of Refiners" in order to keep the consumer from negatively affecting the oil market . . . few believed the President of Standard Oil. However, Rockefeller owned 20 of the 26 Cleveland refineries, and already had enough control of at least the regional market to continue to negotiate secret rebate deals with railroads on his own . . .