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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Hot Oil: East Texas Under Martial Law

Jacob Wolters to Ross Sterling, 1931

On September 2, 1931, the Railroad Commission issued a new proration order, limiting production to 400,000 barrels a day, with individual wells capped at 225 barrels a day. Almost overnight, the price of crude rose from two cents to 85 cents a barrel. But the commission’s new rules failed to take into account acreage and well potential. Even with the presence of the military, operators could not resist producing above the prorationing limit. Such production was called “hot oil,” and bootlegging it across state lines became the stuff of legends. Later it was learned that many Railroad Commission investigators were paid simply to look the other way.

Sterling issued Special Order 48, which allowed violators of prorationing to be tried in military court. But even this threat did not deter operators from waste and civil disobedience. Valuable and strategic resources were evaporating on a daily basis as natural gas vented into the air. The daily loss of underground oil was compared to a thousand burning oil wells. Observers began to compare the situation to the 19th century destruction of the buffalo. Humble’s William Farish said in amazement, “If an inhabitant from Mars were to visit us, he could hardly escape a feeling of bewilderment if not actual dismay at the manner we earthlings carry on this great enterprise, so essential to our convenience and welfare.”

Survey of the "Mary Christmas" tract in East Texas, 1931

J. Edgar Pew of Sun called for a rethinking of the rule of capture. Game laws restricted hunting in the public good, and zoning laws put limits on the use of private property. Surely a solution could be found for the oil industry also. As things stood, Pew said, the rule of capture was a Frankenstein’s monster, “which bids fair to ruin its creator and destroy a most important natural resource.”

In February 1932, a federal judge in Austin overturned Sterling’s right to impose martial law. The governor appealed the decision to the United States Supreme Court. In the meantime, East Texas operators resumed full-scale production. Sterling’s troops could try to keep the peace but were forbidden to enforce prorationing. By this point, troop morale was suffering badly. The original National Guard troops had been sent home, and the new troops were inexperienced men drawn from the ranks of the unemployed. The drama of the initial order had faded, and the public was losing confidence in both Sterling and the Railroad Commission.

One of the many injunctions filed against Railroad Commission orders

Without the troops, the Railroad Commission itself lacked the authority to enforce its own rules. Inspectors who showed up to try to enforce the rules found themselves met by operators with shotguns. In 1932, court injunctions stayed all 19 of the commission’s prorationing orders.

The Turning of the Tide

Several trends in 1932 can be seen in retrospect to make the turning of the tide in the East Texas oil wars. First, the courts began to look more favorably on prorationing and regulation. In March 1932, the Texas Court of Civil Appeals sustained prorationing in the Texas Panhandle. In May, the U.S. Supreme Court upheld Oklahoma’s prorationing statute.

Second, the people in East Texas began to realize that the situation had to change. Carl Estes, the crusading Tyler editor, began to write that low prices, exhaustion of reservoir pressure, and decline in property values were shutting out the small independents he championed. In June, a full 90 percent of East Texas operators signed on to ask for a reinstatement of prorationing in the area.

Finally, the Railroad Commission received an infusion of personality and drive that would transform the agency. Governor Sterling appointed Ernest O. Thompson, the former mayor of Amarillo, to the commission. Thompson was a new face with no baggage from the protracted crisis. He was known for forcing the utility companies in Amarillo to lower their rates, even threatening to kick out the gas company and construct a new city system from scratch if the company did not comply. Thompson had little technical knowledge, but he understood the political changes that had taken place in Texas. The Railroad Commission needed to change or die. Thompson was determined that the agency would not only survive but become a major player on the national scene.

Oil map of Caldwell and Guadalupe counties, 1932

In the fall, overproduction was once again driving the price of crude down near 30 cents a barrel. With the full support of many East Texans, the Railroad Commission issued a new order lowering the allowable in the region. Once again, the federal court struck down the order, leaving the commission helpless to enforce prorationing. In Tyler, 1500 oil-men met to protest the decision, saying it would “plunge [Texas] back into the economic pit of despair.” The oil-men petitioned Sterling to call a special session of the legislature to rewrite Texas law. They wanted strong conservation with adequate enforcement. It was a 180-degree turnaround from the previous year.

The legislature met in November in a session that would prove both chaotic and confrontational. Sterling called for the legislature to protect the state’s revenues. Texas now produced oil at twice the value of its cotton crop. Oil affected the livelihood of banks, merchants, and other businesses, and the state derived more than one-half of its income from petroleum taxes. Railroad Commission chairman Charles V. Terrell testified that court rulings were destroying the East Texas Field; shrewdly, he reminded the legislature that if the Railroad Commission was not allowed to determine the levels to meet market demand, “someone in New York” would.

"Come on, men, let's stop this leak!"

In the end, the Market Demand Act was passed and gave the Railroad Commission the authority to prorate, or set the rate at which every well in Texas could produce. Governor Sterling declared, “From now on, there will be none [oil and gas] taken without the consent of the state.” Major firms and independents supported the law. The commission immediately issued new orders based on well potential, acreage, and field pressure. Prices rose from 10 cents to 85 cents a barrel.

The situation began to stabilize. The breathing room gave both producers and the commission time to gain a better understanding of the geology that underlay the field’s potential. Adherence to prorationing in East Texas and elsewhere began to restore legitimacy to the Railroad Commission. In December, the commission held its first public hearing in months not marked by demonstrations, shouting, and rowdiness.

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Page last modified: August 18, 2011