How the Free Enterprise System Created Americas Oil Barons

By Markets Fool.com

The American dream is simply the belief that anyone, regardless of humble beginnings, can, through hard work, move up the wealth ladder and improve their social standing. The epitome of that dream is to become wealthy beyond our wildest imagination, or at the very least financially independent.

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What has enabled the dreams of so many to become a reality is the free enterprise system, which allows market factors, instead of government regulation, to drive wealth creation. It is a system that has been used by many Americans to amass great wealth. Here is how the great oil barons of yesteryear, and those still being minted today, used the free enterprise system to create lasting wealth.

What is the free enterprise system?
The dictionary definition of a free enterprise system is as follows:

It is an economic and political doctrine holding that a capitalist economy can regulate itself in a freely competitive market through the relationship of supply and demand with a minimum of governmental intervention and regulation.

Basically, the free enterprise system allows a business owner to make decisions based on market conditions as opposed to government intervention. It allows an entrepreneur to choose what businesses they want to be involved in, business owners to set their own prices, and both to buyassets or other companies with few restrictions. It's a system that has driven the creation of a strong energy industry in the U.S.

Early flaws exploited by the first oil baron
The free enterprise system minted its first oil baron by paving the way for industrialist John D. Rockefeller to co-found the Standard Oil Company in 1870. Rockefeller quickly built Standard Oil as he was free to acquire rival petroleum companies. The company, which started as an oil refiner, at first set out to horizontally integrate within the refining sector. By integrating, Standard Oil was able to streamline its operations to cut costs and then undercut the price of its competitors. Those competitors were then forced to sell out to Standard Oil, which further improved its profitability and competitive position. The company then went on to vertically integrate into oil development, which reduced costs further and improved profitability. At its peak Standard Oil controlled 90% of the petroleum market in the U.S.

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Because of this near total control of the market Standard Oil became an early poster child for the dark side of the free enterprise system. The company was eventually declared an illegal monopoly by the U.S. Supreme Court, which broke the company up into 33 smaller companies. However, through it all, John D. Rockefeller became a very, very rich man and was in fact the richest in the world with a net worth at the time of his death in 1937 that was estimated at $336 billion adjusted for inflation.

Despite the changes, the system remains largely intact
The flaws of the free enterprise system aside, what allowed Rockefeller to become wealthy was his ability to choose to be an oil man. It's a choice many others have freely made. One that did was J. Paul Getty who founded the Getty Oil Company. Getty lived by the formula "rise early, work hard, and strike oil," and because of that he, like Rockefeller, was able to ride the free enterprise system to become the wealthiest man of his time. In 1966 his net worth topped $1.2 billion, which at the time made him the 67thrichest American ever based on his wealth as a percentage of the gross domestic production. It was all because Getty was free to compete to drill wells with little restriction, which enabled him to profit from striking oil.

Likewise, the new oil barons of today, people like Continental Resources founder Harold Hamm, have used the free enterprise systems to create vast oil empires. Hamm, for example, got his start by deciding to drill wildcat oil wells in Oklahoma. It's a decision that could have come up dry, and did for so many other would-be oil barons, but Hamm was lucky and struck oil. Because he has been largely uninterrupted by regulation his company has drilled hundreds of wells across the U.S. turning him into a multibillionaire. That is a similar story line for many other wealthy oil men that found the freedom to drill their way to oil-fueled riches.

Takeaway
The American dream is that anyone can pursue their dreams to move up the social ladder. It's a dream that has been made possible by the free enterprise system, which in the oil industry alone has created vast personal wealth for dozens of notable oil tycoons over the years. It's a system that will likely continue to create vast wealth because anyone is free to create any company, including an oil company, if that's how a person chooses to pursue his or her wealth-creation dreams.

The article How the Free Enterprise System Created Americas Oil Barons originally appeared on Fool.com.

Matt DiLallo has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.