In the early 1870s, the Rothschilds were an established banking family active across Europe. The Nobels were lesser known, at least in the financial capitals of the continent, engaged as they were in the armaments industry of distant Russia. Still, within thirty years, the Nobels and one branch of the Rothschild family would find themselves the dominant players in the same business, one far removed from each of their older pursuits.
This was not just any business but a burgeoning new one. This was the oil trade in what had just become the largest oil producing country in the world. The Rothschilds and Nobels succeeded in dominating Russia’s oil industry, centered then around the city of Baku, because they each managed to overcome the market’s biggest constraint. The two families successfully overcame the logistical challenges inherent in delivering oil from this faraway corner of Europe, if it could even be considered Europe, to the rest of Russia and the world. For the Rothschilds especially, succeeding here was the result of deep financial resources expeditiously deployed.
Baku Oil Fields
The story of how the most famous banking family in the world entered the oil business starts in what is now Azerbaijan. The Absheron peninsula, home to the principal Azeri city of Baku, had been known for its oil seepages for centuries. Oil here could be extracted easily from hand-dug wells. In the earlier part of the 19th century, the area was transferred from Persian to Russian rule. The first oil refineries in the broader North Caucasus region were built soon after, in 1823. Already by 1850, there were 136 oil wells in the area around Baku and there would be more than 400 by 1872. During these early years, the industry was run as a state monopoly, a status to which it would later return.
Despite its growth, the oil industry in Baku lost share to booming American production after Edwin Drake struck oil in the United States in 1859. His well kicked off an oil boom in that country. Compared to the petroleum more-easily extracted in Russia, American oil had the advantage of being less dense or ‘lighter’ and was therefore more easily refined, usually into kerosene, with less of it lost to waste along the way. The first American kerosene shipments reached Russia’s capital St. Petersburg in 1862 and the new illuminating oil was widely accepted in the Russian city that sees barely six hours of sunlight in the winter months. Between 1869 and 1872, the United States was supplying 80% or more of Russian kerosene demand, this despite the latter’s own native industry.
Responding to its diminishing relevance in the oil business, the Russian government relinquished state ownership of oil deposits in 1872. It auctioned off these holdings to private buyers. In the wake of this liberalization, production surged and prices fell. Within a year, eighty primitive refineries were processing crude oil into kerosene. In the underdeveloped country, this growing production still had to be shipped to more central regions of Russia in wooden barrels atop donkey-driven carts.
In any case, the government removed special taxes on kerosene production later that decade. All this meant that Russian kerosene was quickly displacing American product in the former’s domestic market, where it had previously relied on protective tariffs to survive. Prices for kerosene fell from two ruble per pound to twenty-five kopeks between 1877 and 1885. Driven by lower prices, domestic consumption was growing by 14% per year.
The resurgence of the Russian oil industry continued for some time. Its production would by 1901 exceed that of the United States and the country would go on to contribute half of the global crude oil production of this period. The amount of oil extracted in Russia then was somewhere in the region of 11.5 – 12.0 million tons compared to 9.1 million in America. The largest producer of this Russian output was a firm established by the now-famous Nobel family, the Petroleum Production Company Nobel Brothers Limited, or ‘Branobel’ for short. In the days before the automobile, their crude oil was largely used to produce valuable lighting oils or lubricants.
The Nobel family, originally from Sweden, was comprised of successful engineers, chemists, and businessmen. They were drawn to the Caucasus in order to obtain wood for manufacturing gun stocks; the family had previously obtained a contract to manufacture rifles for the Russian military. In 1874, using money intended to acquire wood, Robert Nobel instead purchased a refinery in Baku, convinced of the potential for greater profits in the oil industry. Despite their impromptu entry into the business, the family proved to be innovators in the underdeveloped, and up to then still quite beleaguered, Baku oil industry.
The Nobels sent an engineer, the future Russian industrialist Alexander Bari, to the United States to study the oil industry there. Together with his brother Ludvig, Robert Nobel introduced railway tank-wagons and oil tanker ships to Russia. Ludvig and Robert were the older brothers of Alfred, the more well-known founder of the Nobel Prize. When Ludvig died in 1888, some newspapers mistakenly reported the death of Alfred; the premature obituaries condemned him as man who made a fortune as a munitions maker. This is what encouraged him to establish the Nobel Prize.
Returning to their oil interests though, one of the earliest Nobel vessels, the Zoroastr, was the first commercially successful oil tanker in the world. The brothers also built a pipeline to carry oil from its wells to its own refinery. What the family was building was a vertically integrated oil company, spanning production, transport, refining, and delivery. Their integration and large transport capacity in an industry plagued by bottlenecks were the source of the company’s success. By 1880, the brothers dominated the Russian oil market and they were in search of foreign markets in order to expand sales. Their firm was compared to Standard Oil in America, which had hitherto supplied Europe with kerosene; the Nobels were known as the “Russian Rockefellers”.
By 1883, the Nobel brothers’ operation was accounting for half of kerosene shipments from Baku. Their competitors suffered from inferior access to pipeline and railway infrastructure. The Nobels sought to maintain this advantage in the face of others’ attempts to break it. To this end, they approached the Paris branch of the Rothschild banking family in 1883 in order to secure financing for a railway from Baku to the Black Sea. They secured this money but at a cost; their borrowing drew the Rothschilds’ attention to the booming oil business in Russia. Their contact with the rich banking family would therefore prove a mixed blessing.
The Nobel brothers were not the source of the Rothschilds’ first foray into oil. The family’s Parisian branch stepped into the industry when they purchased a refinery in Fiume on the Adriatic Sea in 1879. The family were connected to the Russian industry when searching for cheaper oil for their Fiume refinery. Baron Alphonse Rothschild, who led the Paris branch of the banking family, acquired the ‘Batumi Oil Industry and Trade Company’, known by its Russian initials BNITO, in 1886. They rebranded the firm ‘Caspian-Black Sea Oil Industry and Trade Company’; this would become the vehicle for their Russian oil operations.
At the Rothschilds’ behest, BNITO bought Russian kerosene from 135 other companies and exported it abroad. The Rothschild strategy was to loan money to these smaller producers, lock up rights to their oil at advantageous prices, and sell that oil in Russia and abroad. BNITO exported 2.4 million Russian poods (~40 million kilograms) of kerosene in 1884 (a ‘pood’ is a customary Russian unit equivalent to 16.38 kilograms). With the Rothschilds’ backing this volume grew; company exports reached 30 million poods (~490 million kilograms) five years later.
Like the Nobel brothers, the Rothschilds benefited from positive ties with the Russian government. The bankers had previously issued Russian loans in France. Alphonse Rothschild’s financing of the Transcaucasian Railway, which connected Baku to the Black Sea and facilitated increased exports of Russian oil, only helped cement their welcomed involvement in the country. Unlike the Nobels though, the Rothschilds had unrivaled financial resources too. In line with its commercial strategy, their company lent two million rubles to smaller firms in need of tank-wagons.
The Rothschilds provided these five-year loans at 6% interest to smaller refiners who needed the financing to acquire the tank-wagons that eased their relative logistical weaknesses. This strengthened their competitive position vis-à-vis the Nobel brothers who perhaps by this point greatly regretted drawing the attention of the Rothschilds to this otherwise easily forgotten corner of the world.
As just an example of their share of the export market, of the nearly 4,000 tank-wagons of kerosene shipped on the Transcaucasian Railway in December 1888, 1,800 were received by the Rothschild firm. That year, the Rothschild company exported more than 16 million poods (~260 million kilograms) of kerosene; a volume that comprised over 58% of Russian exports. Alphonse Rothschild also established Mazut, a trade and transport company focusing on shipping oil to destinations within Russia, which then spanned Eastern Europe to include the Baltic states and parts of Poland.
The Rothschilds also recognized that the future of oil transport lied in pipelines and not railways. Having already funded a railway, they now supported the construction of a pipeline from Baku to Batumi on the Black Sea, a pipeline which allowed for further transport capacity.
Competition and Cartel
The Nobels and Rothschilds competed in the business of refining kerosene but the latter’s financial strength hardly extinguished the position of the former. In 1890, plants owned by the Nobel brothers produced 17.9 million poods of lighting oils whereas the Rothschilds produced 4.7 million. Both operations had the substantial logistical capacity, whether it be by railway, tanker ships, or pipeline, needed to transport this product to its final domestic or international destinations. They also each went so far as to operate their own ship repair facilities on the Caspian Sea to keep the movement of oil by tankers there uninterrupted.
In truth, they were not necessarily the fiercest competitors. Both firms had a common foe, competing as they were against American oil and its leading firm, Standard Oil, which was trying to find its way back into the Russian oil market. A cartel agreement was formed between the Nobels and Rothschilds in 1903, illustrating their common aims and common worries. Under this arrangement, the firms agreed to cooperate on exporting Russian kerosene abroad but the cartel inevitably also held a strong position in the domestic market. By 1909, the cartel received 90% of the gross sales of oil produced in Baku and controlled all the warehouses and barges it needed to store and transport this oil itself.
The Rothschild involvement in Russian oil declined from here. The bankers would sell their Russian holdings to the Anglo-Dutch firm Royal Dutch Shell in 1912, likely because of the diplomatic tension in the air on the eve of the First World War in addition to local political unrest. As a result of this sale, the banking family was not directly affected by the nationalization of the oil industry by the communists following the Russian Revolution in 1917.
By contrast, the Nobel family were not so fortunate. They eventually fled the country during the Revolution in two groups, one disguised as peasants and another escaping only by sled and on foot through the Russo-Finnish border. Nonetheless, even they salvaged something by putting their company on the market.
Remarkably, the Nobels succeeded in selling half of their holdings in Branobel to their rival, Standard Oil, even after the Bolsheviks had nationalized the company. Standard Oil was betting the new regime would not last and did not want to see a competitor pick up the previously-lucrative firm at a fire-sale price; Royal Dutch Shell had also been looking at the company. In any case, the Nobels would from then on be better known for their eponymous prizes than for oil.
Extracting oil is capital intensive. Developing wells, laying pipelines, launching oil tankers, and building refineries all require a lot of money. The result is an industry where those able to marshal large amounts of capital have a competitive advantage. Though the Rothschilds were slower to enter Baku’s oil industry, they were able to become the strongest competitor to the Nobel brothers. It all started when the Nobels searched for a lender in the Rothschilds. The bankers’ direct operations in Baku began via loans to smaller refiners, the conditions of which allowed the Rothschilds to seize an opportunity marketing Baku’s oil abroad. Bankers may not seem to make natural oilmen but the capital needs of these firms make financial acumen and access to financial resources indispensable to the industry.
More from the Tontine Coffee-House
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1. “French Oil Business.” Guide to the Collections of The Rothschild Archive, The Rothschild Archive.
2. McKay, John P. “Baku Oil and Transcaucasian Pipelines, 1883–1891: A Study in Tsarist Economic Policy.” Slavic Review, vol. 43, no. 4, 1984, pp. 604–623.
3. Mir-Babayev, Miryusif. A Concise History of Azerbaijani Oil. 2008.
4. Yergin, Daniel. The Prize: The Epic Quest for Oil, Money & Power. Simon & Schuster, 2012.
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