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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The MacMillan Case

The East Texas Field had become a hyper-boomtown. Derricks were everywhere. By the summer of 1931, some 600,000 barrels a day were flowing out of East Texas. At night the towns were alight with the glow of flares as unwanted gas produced with oil was burned off. Oil towns like Longview were open 24 hours a day, with gambling dens and houses of prostitution springing up to entertain the workers and fleece them out of their earnings. Armed robberies and murders became frequent enough that many people were afraid to go out at night. One Texas Ranger, Manuel T. “The Law” Gonzaulles, became famous, but there was not enough law enforcement to go around. In such an atmosphere, it seemed anything could happen. Frank Hamer, another famed Texas Ranger, was convinced that Communist agitators were planning to blow up refineries, pipelines, and storage tanks.

Some producers realized that the wild atmosphere had to give way if the East Texas Field was to have any long-term potential. For the first time in history, the oil industry faced ruin from overproduction. The price of crude stood at 6 cents a barrel (while the cost of production was about 80 cents a barrel). The state itself faced budgetary disaster from declining royalties. The Railroad Commission warned Governor Ross Sterling that “The time will come when our oil and gas reserves will be greatly depleted or exhausted,” and “if no cheap substitute is available, the calamity will be too serious to contemplate.”

Railroad Commission orders for East Texas, 1931

Governor Sterling, himself a past president of Humble, proposed a voluntary plan that would limit production to 200,000 barrels a day, to be increased if market demand increased. Small operators would receive special consideration, being allowed up 600 barrels a day. But Sterling’s plan never got off the ground. Few people believed any longer that the industry could regulate itself on a voluntary basis. William Farish of Humble said, “No one in the industry today has sense enough or knows enough” to be self-regulating. In July 1931, the Railroad Commission issued a proration order similar to Sterling’s plan.

Governor Sterling called a special session of the Texas legislature to deal with the East Texas crisis. It promised to be a contentious affair. Carl Estes, the crusading editor from Tyler, warned the politicians that, “Every one of you to a man was bawling around from the stump in this state, preaching the doctrine of retrieving the little man, the home, and small farmers and busting the trusts. Well, this is your opportunity to make good on those sweet-sounding promises.” Estes’s words reflected the views of many Texans, who were suspicious of any measures that seemed likely to promote big business or big government or that would raise the price of gasoline.

R.M. Farrar to Governor Sterling, 1931

As the special session was convening, a federal judge in Austin ruled in the case of MacMillan v. Railroad Commission. An East Texas operators had sued the commission, arguing that according to Texas law, the Railroad Commission could consider only physical waste, not economic waste. Thus, prorationing in an attempt to prop up market prices was price fixing and deprived operators of the right to use their private property as they wished. The court agreed, ruling that the commission could act only to prevent physical waste or contamination. Otherwise, property owners should be free to do as they pleased.

MacMillan racheted the crisis up to a new level. Private property rights were a treasured, even sacred tenet of American law. The United States was the only country in the world in which the nation’s oil resources were in private hands. Yet, oil had become a resource of vital interest not only to private business but to the public welfare. East Texas production alone now supplied one-half of the U.S. market demand and undersold Russian oil in Europe. Unrestrained production in East Texas was not only depressing prices but ruining field pressure and threatening the loss of hundreds of thousands of barrels.

Sterling Sends in the Troops

"Said the Governor to the Governor"

At the legislative special session, R.C. Parker of the Railroad Commission gave frank testimony that explained the reasons why the agency had failed to control the situation in East Texas. Parker detailed the continuous court injunctions and the lack of authority to enforce rules. It was time for the legislature to accept that the realities of the market meant that the Railroad Commission needed the authority to prevent the economic waste taking place in East Texas. Jacob Wolters of the Texas Company (Texaco), warned of the ruin of thousands of wells, as well as “the bankruptcy of producers, the loss of millions of dollars in revenues of the State, and the consequent increase of taxes on other sources in order that the public schools, higher institutions of learning, eleemosynary institutions and the departments of the State may continue to function.”

In spite of the warnings, both Governor Sterling and the legislature waffled. As an oil-man, Sterling hated the exploitation in East Texas. Production was running at fully twice the level set earlier in the summer by the Railroad Commission. East Texas was virtually in a state of lawlessness. Over a million barrels a day were flowing out of the field, and the price had now dropped as low as two cents a barrel. Desperate operators were pumping even more in a self-defeating attempt to make back some money. Others were threatening to dynamite other operators’ wells or even set the oil fields on fire. As one operator put it, “Hell, I sell a barrel of oil at ten cents and a bowl of chili costs me fifteen.”

Literary Digest article on martial law in the oilfields

At this rate, Sterling knew, the field would be soon ruined, and everyone in Texas would lose out. Oil was not like other natural resources such as cotton, wheat, or sugar, for it could not be renewed. Sterling was receiving hundreds of telegrams a day from oilmen and businessmen throughout Texas calling for stronger conservation laws. But what to do in the face of MacMillan?

The situation in Texas adversely affected other oil-producing states and had become a nationwide issue. Secretary of the Interior Joseph M. Dixon placed the blame for the industry’s sickness squarely on “Texas, its Legislature, and selfish and irresponsible interests operating in the East Texas pool.” On August 4, 1931, Governor William “Alfalfa Bill” Murray of Oklahoma declared martial law in the Oklahoma City and Seminole fields and declared that troops would remain there to control production and enforce law and order until prices rebounded to a dollar a barrel. East Texas operators praised Murray’s action, saying, “the same fine character of leadership and courage has not been shown in the State of Texas.”

Troopers on patrol in East Texas, 1931

Thus goaded, on August 11, the Texas legislature passed the Anti-Market Demand Act, strengthening the Railroad Commission’s authority to prevent physical waste but continuing to forbid the setting of production limits based on market demand. On the other hand, the act also limited the ability of operators to get court injunctions. With this act, the legislature hoped that production in East Texas would drop by about 300,000 barrels a day, a total drop in state production of about 20 percent.

It was apparent to Sterling and others that production could not be controlled simply by passing a law and hoping that East Texas would comply. On August 14, a group of 1200 producers met in Tyler and asked the governor to save them from themselves, unanimously voting on a measure requesting Sterling to declare martial law. On August 17, they got their wish. Sterling declared that a “state of insurrection” existed in Gregg, Rusk, Smith, and Upshur counties. He ordered 1100 soldiers of the Texas National Guard to Kilgore. By noon the next day, all production in East Texas was temporarily shut down. The area was now under military rule.

Side TripLearn more about Ross Sterling and see his martial law proclamation at our Portraits of Texas Governors site.

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Page last modified: August 18, 2011