Hazardous Business
Industry, Regulation, and the Texas Railroad Commission
The Railroads Come to Texas
The Fight for the Commission
John H. Reagan and Early Regulation
The Oil Wars
The Power Years
Other Responsibilities
The Railroad Commission Today

The Oil Wars

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Blood of War, Blood of Peace

Flow tank on fire near Eastland

In 1918, Harry G. Berenger, director of the French agency in charge of petroleum resources, noted that, “As oil had been the blood of war, so it would be the blood of the peace." Berenger’s words proved prophetic. By the 1920s, petroleum was widely recognized as a vital strategic and economic asset. The automobile became the primary means of transportation for millions of Americans in the 1920s. U.S. Navy vessels switched from coal to oil during the decade. Production soared from the 1901 level of 69 million barrels to more than a billion in 1929.

D.C. Morris to D.E. Woods, 1920

During these years, wild swings in production caused oil prices to be very unstable. Oil-men recognized that only steady production could keep prices high enough for everyone to make a profit. But stability in the oil market would benefit others as well. The government wanted to conserve the vital but non-renewable resource, and the public wanted an inexpensive but reliable supply of fuel. In practice, however, the industry continued to operate as a free-for-all. The rule of capture encouraged unrestrained production. The result was crisis after crisis.

In Texas, the Railroad Commission took on its new responsibilities with the same progressive spirit as it had approached the railroads. It offered education for operators in sound practices, collected and analyzed statistics, and tried to foster cooperation between the industry and government.

Production in Brown County, 1920

The commission had occasional success in persuading operators to curb dangerous and wasteful practices. In general, however, the operators viewed politicians with contempt and any attempt to interfere in the industry as socialism. In 1924, when President Calvin Coolidge created the Federal Oil Conservation Board and asked it to devise a plan to conserve oil for national security purposes, oil-men testified that there were no problems with the industry and no need for a plan. Through the American Petroleum Institute (API), industry leaders brought suit and were able to have Coolidge’s board stripped of any enforcement power.

Daily reports of JH Morehouse, 1924

Some industry executives recognized the problem of overproduction and tried to take steps to regulate it themselves without government interference. In 1927, the spectacular new Yates Field, nicknamed the “Queen of the Pecos,” was spewing out more than 192,000 barrels of oil a day, all without pipelines by which to carry the black gold to refineries. The president of Humble Oil (later Exxon), William S. Farish, proposed a scheme of voluntary proration, by which operators would agree to production limits. In return, Humble would build a pipeline and carry 30,000 barrels a day to its refinery.

Farish encountered numerous problems to this approach. First, the prorationing could be considered collusion and price-fixing, which would run afoul of state antitrust laws. Though the Texas attorney general had informally promised Farish that he would look the other way and allow the scheme to work, such a promise was no guarantee of the future. Second, several large companies, including Gulf and Pure, did not join in the production agreement. Overproduction continued at Yates, and later in the year, Yates was joined by another huge strike in the Permian Basin, this one called Hendrick Field.

The Growing Crisis

States began to look for a way to combat the rule of capture and establish new legal principles that would balance the rights of the individual property owner against the rights of the community as a whole. In 1927, the Indiana Supreme Court ruled that operators did not have the right to waste natural gas in pursuit of oil, calling the interests of the operator of “small consequence” compared to the “calamity which it mercilessly and cruelly held over the heads of the people of Indiana” by wasting the gas. However, the United States Supreme Court knocked down the Indiana decision.

Letter from Roxana Petroleum Company, 1928

In 1928, the Texas Railroad Commission stepped in to try to enforce prorationing at Hendrick Field. It was the first time that the commission had attempted to use the 1919 law that gave it authority to regulate production. Within a year of the discovery of Hendrick Field, more than half of its wells were useless because careless drilling practices had flooded out production. In addition, so much oil had been produced that it was selling for only 10 cents a barrel. The Railroad Commission ordered Hendrick divided into 40-acre units. Production was to be strictly allocated, with one-half being apportioned equally to each unit, and the other half being allocated according to the unit’s percentage of total field production. The approach was based on the voluntary prorationing scheme that William Farish of Humble Oil had advocated the year before at Yates Field.

This first-ever prorationing order limited Hendrick to 150,000 total barrels per day, only 20 percent of the maximum capacity of the field. Despite complaints and considerable defiance by wildcatters, the order was partially successful. Within a year, the price of oil had risen and stabilized, and the life of Hendrick Field had been extended by an estimated 20 to 50 percent.

The second prorationing order applied to Yates Field. At Yates, the commission divided the field into 100-acres units, and set production quotas based on one-fourth acreage and three-fourths well potential.

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Page last modified: August 18, 2011