The Danger of Assumed Sovereign Power: The Standard Oil Trust in China

Successful companies seeking growth frequently extend into new products, industries, or territories. When a company from one country plans to expand into one or more foreign countries, it must have a foreign policy toward the new territories that includes strategic planning with international and domestic law considerations. Political, financial, economic development, corporate, tax, and liability considerations may drive decisions regarding the multinational structure. International legal norms inform the relationship between a corporate interest and local government and the division of responsibility and authority. But, political and corporate authority sometimes overlap. Joshua Barkan discusses political sovereignty through corporate land control where sovereign power comes with rights to the jurisdiction of property.[1] Steven Coll writes a case study on Exxon Mobil and its self-developed foreign policy used to conduct beneficial business nationally and internationally without the interference of the United States government.[2] Both Barkan and Coll’s respective analyses provide insight regarding the Standard Oil Company. As one of the largest commercial corporations in the United States, the Standard Oil Company possessed so much power that it mirrored a sovereign body with its own regulations and hierarchical structure.[3] The Standard Oil Company’s outlook towards business in China foreshadows Exxon Mobil’s current corporate foreign policy. Exxon Mobil is the corporate descendant of the Standard Oil Company of New Jersey and the Standard Oil Company of New York.[4] For the purposes of this paper, the Standard Oil Company’s foreign policy was its strategy to enter the Chinese oil industry and market. With a foreign policy that focused solely on the internal success of Standard Oil, the Standard Oil Company approached China with a method, predicated on a stable system of government. This technique worked in the United States and countries where the Standard Oil Company was the biggest and strongest corporation present and dealt with political powers as an equal. But in China, the Standard Oil Company was in a new culture with fluctuating government stability. The Standard Oil Company encountered obstacles including firm structure, legal boundaries, and land ownership when trying to enter the Chinese oil market, preventing it from successfully operating in China.[5] Assuming sovereign power in the form of rigid business structure and land control hinders a corporation’s ability to successfully enter an industry in an international country.

The Standard Oil Company, led by John D. Rockefeller, pioneered the formation of a successful oil industry monopoly through horizontal and vertical integration. Monopolies limit competition by controlling the price and access to markets, supply-chain, and trade in an industry.[7]  Monopolies transformed the business world in the late nineteenth and early twentieth century. In the United States, Rockefeller, in collaboration with company advisors, expanded the Standard Oil Company into a powerful corporation through strategic expansion initiatives including partnerships with railroads and shipping ports, centralized shipment operations, and creation of a trust.[8]

“Standard Oil Trust Certificate,” Wikimedia Commons, accessed December 12, 2017.

The Standard Oil Company made deals with railroad companies in the United States, including those owned by J.P. Morgan and Cornelius Vanderbilt, promising a regular flow of business in exchange for reduced shipping rates.[10] Other petroleum companies could not compete with the lower shipping prices and many were forced to break apart entirely or merge into the Standard Oil Company.[11] Many companies assimilate into the Standard Oil Company, systematically expanding the company’s control over the chain of oil extraction, purification, and distribution.[12] By 1872, the Standard Oil Company controlled more than a quarter of the total daily capacity of the oil industry.[13] In addition to making deals with the railroad companies, the Standard Oil Company also reconstructed its pipeline network to run more efficiently.[14] The pipeline network connected oil producers in Ohio to shipping ports in Pennsylvania and allowed the streamlined transport of oil over long distances.[15] Creating a cost-efficient pipeline transport system that made it possible to ship and refine oil at designated ship ports, eliminated the role of refineries located at intermediary points and streamlined the production system. Refining the shipping operations centralized the Standard Oil Company’s business operations and allowed them to generate surplus revenues. [16]

The Standard Oil Company’s monopolistic power in the United States encouraged its presumption of sovereignty in China and helps explain its difficulty adjusting to the new territory especially with respect to land control and political agreements. Locating the best lands to build distribution centers and oil refineries helped the Standard Oil Company develop infrastructure to efficiently operate in China. By gaining access to oil rich lands, building distribution centers, and revamping the oil production and distribution processes, the Standard Oil Company put itself in a position to grow sufficient market power to attempt to impose its own sovereignty in China. Developing expertise in foreign petroleum geology and understanding foreign geography enhanced the Standard Oil Company’s perceived sovereign power in China because it could do things domestic Chinese companies and Chinese government could not, such as supply rural farmers and peasants with kerosene and lamps. As the Standard Oil Company identified the lands it needed to build its business structure in China, it also boasted political sovereignty. As Barkan notes, sovereignty derives from a corporation’s land holdings within its parent country and in a foreign country.[18] The Standard Oil Company presumed it had sovereign power in China and should thus have the ability to control oil rich lands there.

“Standard Oil Company Power Political Cartoon,” Wikimedia Commons, accessed December 12, 2017

Since the Standard Oil Company wanted access to oil deposits in China, it needed to form a partnership with the Chinese government.  Discussions and agreements about oil distribution in China were also hindered by the Standard Oil Company’s conception of sovereign power. A difficulty in the partnership agreements involved the Standard Oil Company’s perception of its own sovereignty in China. As Barkan mentions, corporations function as a unique sovereign power when they have control or perceived control of land.[19] With this in mind, the Standard Oil Company assumed sovereign rights in the United States and attempted to apply them when operating in China. It is important to note here that many companies and people in the United States were against the growing power of the Standard Oil Company, but this did not stop the company from growing its strength and influence over the United States Business Industry.[20]  When the Standard Oil Company and the Chinese Government met to form a partnership for the production and distribution of oil across China, they both assumed they had absolute sovereign power. This mutual misassumption preempted difficult conversations. The Chinese Government believed it had absolute sovereign power, given it was the governing body in China. On the other hand, the Standard Oil Company entered discussions viewing itself as a sovereign body with rights to control lands granted it needed for oil production.[21] Basically, the Standard Oil Company only wanted to operate in China to benefit its own investment in the Chinese oil industry. Whether or not the Chinese government had enough funding was not a relevant matter for the Standard Oil Company, despite negotiation agreements.

Because American corporations, in certain circumstances during the industrial age, acted like sovereign powers, they developed an extreme perspective of their sovereign rights compared to similar companies in other countries. Because of its exercise of sovereign power in the United States, the Standard Oil Company built a business structure that worked in America.  When the Standard Oil Company operated in China without a plan, it used the experience as an opportunity to understand the markets well enough to do business within their honed business model for the United States.

By assuming sovereignty and taking over an industry without compromising, the Standard Oil Company demonstrated its adherence to a business model that helped it gain domain in the United States. In China, Standard Oil Company representatives understood the structure but did not feel they had the liberty to return to the United States and recommend a different model to use in China. This exemplifies a bureaucratic context. In fact, economist Robert Merton writes how “good bureaucratic behavior” can lead to “dysfunctional” outcomes.[22] Because a company acts like a sovereign, its structure also reflects that of a sovereign. Mid-level bureaucrats within the company act like mid-level government bureaucrats. While the Standard Oil Company bureaucrats in China followed corporate procedures, they wound up hindering company success. Had the Standard Oil Company acted in a way that supported the budding democracy in China at that time, both the Standard Oil Company’s interest in China and China’s government outcomes would have been different. [23] If the Standard Oil Company demonstrated enough interest to help the Chinese government whether through loans or other discussions, China might have been strong enough to deter Japanese aggression in the 1930s and defeat the communist revolution in 1940s.

Having said this, because the Standard Oil Company so avidly acted like a sovereign power in China, it overstepped the Chinese Government. The Chinese Government was not willing to deal with a foreign company that acted like a ruler, while the Standard Oil Company did not have the desire to abandon its assumed power because it was operating in a foreign country. Thus, the Standard Oil Company’s successful operation in China was met with resistance from business operations, competitions, and the presumed translation of sovereign power.

 

 


[1] Joshua Barkan, “Property and Sovereignty: Political Territoriality and the Corporate Control of Land,” Unpublished Paper, (Duke University, Presented 11/3/2017).

[2] Steve Coll, Private empire: ExxonMobil and American Power (London: Penguin, 2013).

[3] Steiner, George A., and John Steiner. Business, government and society. New York, 1994, 72-79.

[4] “Exxon Mobil 10K – 1999,” EXXON MOBIL CORP – 10-K Annual Report – 12/31/1999, Part 1, accessed December 10, 2017, http://getfilings.com/o0000930661-00-000656.html.

[5] Folsom, Burton W. “John D. Rockefeller and the Oil Industry | Burton W. Folsom.” FEE.

October 01, 1988. Accessed December 04, 2017. https://fee.org/articles/john-d-rockefeller-and-the-oil-industry/.

[7] “Definition of “monopoly” – English Dictionary,” Monopoly Definition in the Cambridge English Dictionary, accessed December 09, 2017, https://dictionary.cambridge.org/us/dictionary/english/monopoly.

[8] Elizabeth Granitz; Benjamin Klein, “Monopolization by Raising Rivals Costs: The Standard Oil Case,” Journal of Law & Economics 39, no. 1 (April 1996): 1.

[9]“, https://upload.wikimedia.org/wikipedia/commons/a/a7/Standard_oil.OILSTOCK.JPG

[10]Standard Oil Takes Control of Many Railroads ,” East Oregonian (Pendleton, OR), October 18, 1904, Daily Evening Edition, Page 2, Image 2, col. 2. https://chroniclingamerica.loc.gov/lccn/sn88086023/1904-10-18/ed-1/seq-2.pdf.

[11] John S. McGee, Predatory Price Cutting: The Standard Oil (N.J.) Case, I J. Law & Econ. 137 (1958).

[12] “Standard Oil Company,” In American Eras, 109-111. Vol. 8, Development of the Industrial United States, 1878-1899, U.S. History in Context, (Detroit: Gale, 199), (accessed November 22, 2017).

[13] Ida M. Tarbell, The history of the Standard Oil Company (Gloucester, MA: P. Smith, 1963).

[14] “Standard Oil Company,” In American Eras, 109-111. Vol. 8, Development of the Industrial United States, 1878-1899, U.S. History in Context, (Detroit: Gale, 199), (accessed November 22, 2017), http://link.galegroup.com/apps/doc/CX2536601572/WHIC?u=lom_dur&xid=6e4bc9f3.

[15] Ralph W. Hidy and Muriel E. Hidy, Pioneering in Big Business: 1882-1911 (New York: Harper Brothers, 1955), 180 and Benjamin Klein, “Monopolization by Raising Rivals Costs: The Standard Oil Case,” Journal of Law & Economics 39, no. 1 (April 1996), 6.

[16] “Standard Oil Company Assets,” File: The Standard Oil Company Assets Chart, accessed December 12, 2017,  https://en.wikipedia.org/wiki/File:Standard_oil.gif

[18] Joshua Barkan, “Property and Sovereignty: Political Territoriality and the Corporate Control of Land,” Unpublished Paper, (Duke University, Presented 11/3/2017), 6.

[19] Joshua Barkan, “Property and Sovereignty: Political Territoriality and the Corporate Control of Land,” Unpublished Paper, (Duke University, Presented 11/3/2017), 6.

[20] “Dissolution of Standard Trust Wanted,” Evening Star (Washington D.C.), November 15, 1906, Page 14, Image 14, col 2. https://chroniclingamerica.loc.gov/lccn/sn83045462/1906-11-15/ed-1/seq-1/

[21] Joshua Barkan, “Property and Sovereignty: Political Territoriality and the Corporate Control of Land,” Unpublished Paper, (Duke University, Presented 11/3/2017), 6.

[22] Hal G. Rainey, Understanding and Managing Public Organizations (Wiley, 2014), 55-56.

[23] Reinsch, Paul Samuel. An American Diplomat in China. Doubleday, 1922. https://babel.hathitrust.org/cgi/pt?id=uc2.ark:/13960/t8rb6zh58;view=1up;seq=1.