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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“A Nostrum Worthy of a Blatter Skite Politician”

Hauling a jail to an oil boom town

In 1929, the sense of crisis in the oil industry grew. Vast amounts of supply were being wasted, and prices swung from a profitable $3 a barrel to mere pennies that put the price below operating costs. The American Petroleum Institute (API), representing the major companies, urged its members to limit production to the level matching the last nine months of 1928. API formed committees to study federal regulation of the industry and unitization, a voluntary method of prorationing.

On the federal level, President Herbert Hoover called a summit meeting in Colorado Springs to meet with the governors of oil-producing states, oil company executives, and trade association representatives. Hoover proposed the creation of a federal commission to regulate the industry, an idea fiercely opposed by independent operators, who increasingly took the view that the major producers planned to gang up with the government to put them out of business.

A new well on the Plains

Back in Texas, the independents were fighting a bill in the Texas legislature that would have given the Railroad Commission the power to enforce unitization plans. According to William Farish of Humble, the industry would “have to answer for the uneconomic and wasteful way in which oil and gas are being used.” He supported unitization and production quotas to meet market demand. Some other major companies, including Pan-American (Indiana Standard), Roxanna (Shell), and Marland, supported the bill. But other majors, along with the independents, fought it. F.C. Proctor, the legal counsel for Gulf, called unitization “a nostrum worthy of a blatter skite politician, but not the leaders of a great industry.” In the end, the bill was defeated, and the legislature imposed new restrictions on the Railroad Commission. The commission could still act to combat physical waste or safety violations but was forbidden to consider market demand or economic waste in its decisions.

Original orders for Van field, 1931

Despite the setback, Farish proceeded with a voluntary unitization plan at Van Field near Tyler. Van had been discovered in 1927 and was a typical oil boom with a forest of derricks. To Farish and other supporters of unitization, the unitization plan would ensure conservation of the field’s resources and avoid duplication of effort. But to small operators, the plan seemed a grab by the majors to exploit Van and put them out of business.

The stock market crash in November 1929 and the beginnings of the Great Depression put unitization in a different light for many majors. Executives of Pure, Sun, Shell, and the Texas Company all came on board at Van. They agreed to consolidate their holdings, share expenses and profits in proportion to the size of their leases, and allocate production in the same proportion. They also conducted a study to determine the long-term potential of the field. Because of the voluntary cooperation, fewer dry holes were drilled at Van and the pressure in the underground reservoir of oil was preserved.

“God Still Rules the Universe”

In the early months of 1930, tensions mounted in the oil fields between the majors and the independents. Humble cut its price for crude, hoping that a lower price would force non-compliant independents to curtail their production. But the independents kept pumping, blaming Humble’s arrogance, rather than overproduction, for their loss of income.

The legislature once again attempted to grapple with the problem. The Common Purchaser Law gave the Railroad Commission more authority to control waste, but still forbid market-demand prorationing or any restriction on the number of wells drilled in an area. The new law also expanded the definition of common carrier from pipelines to include oil storage facilities, requiring them to buy crude from all operators without discrimination. This provision was popular with independents.

Humble and other majors believed that the new law would require prorationing in order to ensure that each operator got a fair share of the market, but the Railroad Commission did not make another attempt at issuing or enforcing such an order. Instead, it formed a six-member committee of Texas producers to study the issue and make recommendations.

In July 1930, Humble threw down the gauntlet and tried to make the commission get serious about prorationing again. Farish announced that Humble would cease to purchase oil in seven counties, claiming that they did not have sufficient pipeline capacity. Farish gambled that prorationing would be imposed to regulate the output to Humble’s pipelines.

Golden West letter to the commission, 1930

Independents were outraged at Farish’s actions, seeing them as another attempt to deny them access to facilities that the majors took for granted. One enraged wildcatter told Farish, “God still rules the Universe.” At commission hearings, majors and large independents called for prorationing and a scientific approach to drilling. They took the view of that fields were long-term economic assets. The small independents and wildcatters took a different view. It took $10,000 to drill a well, a fortune to an independent operator. Prorationing meant the operator could not pump out his well or sell his oil at will, thus impeding his ability to pay off debts and start making money. To the independents, prorationing meant denial of their private property rights, pure and simple.

In August, the commission gave in to the pressure from Humble and other majors and issued the first statewide prorationing order, limiting Texas production to 750,000 barrels a day for the next 90 days. Each lease would be divided into 20-acre units for the production quota, and production would be decided scientifically on a field-by-field basis. The commission also published rules for prorationing. Each prorationing order would require 10 days' notice and a public hearing. The orders would be enforced by “field umpires” paid for by the operators (necessary because the commission had no budget to pay for enforcement). The umpires’ decisions could be appealed to the commission.

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Page last modified: August 18, 2011