The natural result of the determination of the Central and Erie to get from the Pennsylvania a percentage of its freight was, of course, increased cutting, and it looked as if a rate war was inevitable. At this juncture Colonel Potts of the Em pire Transportation Company, handling all of the Pennsyl vania freight, suggested to his rivals that' it would be a favourable time for the three trunk lines to pool their sea board oil freight. In the discussions of this proposition, which, of course, involved a new schedule of rates, there being now practically none, it was suggested that henceforth freights be so adjusted that they would be equal to all refiners, on crude and refined from all points. Such an equalisation seems at first glance an unsolvable puzzle. The agents found it intricate enough. Throughout the summer of 1874 they worked on it, holding meetings at Long Branch and Saratoga and calling into their counsels a few of the leading refiners, pipe-line men and producers whom they could trust to keep quiet about the project.
By the first of September they had an agreement worked out by which each of the three roads was to have a fixed per centage of Eastern shipments. The rates to the seaboard were to amount to the same for all refiners wherever located. That is, to use one of the illustrations employed by Mr. Blanchard in explaining the scheme to the Hepburn Commission : "Sup pose roo barrels of refined oil to have been sent from Cleveland to New York by rail ; the consignee was required to first pay freight therefor at New York upon delivery $1.90; to make this quantity of refined oil at that time, he had already paid freight on say 133% barrels of crude oil from the pipes to Cleveland at thirty-five cents per barrel or say $46.67; he had therefore paid out from the pipes to the refinery and thence to New York by transportation only, on ioo barrels refined and the quantity of crude oil required to make it, $236.67 or $2.37 per barrel ; therefore, at the end of the month we refunded the $46.67 already paid on the crude oil. So that the rate paid net was $1.90 to him and all other refiners." In case of the refineries situated at the seaboard the cost of carrying from the Oil Regions the barrels of crude oil required to make ioo barrels of refined was made'exactly the same as carrying the ioo barrels of refined made in the West and transported East. This really amounted to charg ing nothing for getting the crude oil to a refinery wherever it was situated, as the following clause in the agreement shows: "The roads transporting the refined oil shall refund to the refiners as a drawback the charges paid by them upon the crude oil reaching their refineries by rail." This para graph provided for this crude rebate contained a second clause, which read: "And the roads transporting through crude oil to the Eastern seaboard shall refund to the ship pers twenty-two cents per barrel; both of said drawbacks to be paid only on oil reaching the initial points of rail shipment, through pipes, the owners of which maintain agreed rates of pipage." The paragraph announced two new
and startling intentions on the part of the oil-carrying roads: first, that they intended to strip the Oil Regions of the advan tage of geographical position at the wells by sending oil free to Cleveland and Pittsburg, New York and Philadelphia, at the same time leaving these cities the advantages accruing from their position as manufacturing centres and close to domestic markets; second, that they had entered into a com bination with certain pipe-lines to drive certain others out of existence.
Mr. Blanchard gave the reasons of these two revolutionary moves to the Hepburn Committee. It was "urgently repre sented to the trunk lines," he said, "by some refiners at the West as well as by others at the seaboard, and also by crude shippers and receivers and by owners of pipe-lines, that it was in every way desirable that the refiners of Cleveland and Pittsburg, and those at the seaboard be put upon a basis of equalisation in the gross rates of transportation to and from the refineries." Now to do this the element of distance had to be disregarded. Cleveland was iso miles west of the Oil Regions, but she must be treated as if she were at the same distance from the seaboard. As soon as the proposition was made, certain of the refiners and producers objected unless the railroads went further and equalised rates on coal, acids, , cooperage, etc. This, however, the roads declined to do.
As for the second clause—the rebate on all oil coming from pipes which kept up a fixed pipage—it came about in this way. While the railroad men were in conference at Long Branch, Henry Harley, the president of the Transportation Company, came to them and said that he believed the scheme of equalisation could not be carried out unless some kind of an alliance was made with the pipe-lines. There had been a large increase in the number of pipes in, the four or five years preceding, and a situation had arisen not unlike that in every other branch of the oil business. There was perhaps twice the pipe capacity needed for gathering all the oil produced, and as the pipes were under at least a dozen different managements, each fighting for business, the result was, of course, just what it had been on the railroads and in the markets—severe cutting of prices, rebates, special se cret arrangements, confusion and loss. It had been only nine years since the first pipe-line had been a success, and consider ing the phenomenal growth of the business and the important part the pipe played in it, it was of course a situation natural enough. Like the overgrowth of refining and of production, it was something only time and solidification of business could remedy.