The Oil Wars

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The Era of State and Federal Cooperation Begins

In July 1933, President Roosevelt issued an executive order banning the shipment of hot oil and giving enforcement responsibilities to the Secretary of the Interior. Ickes sent federal agents to East Texas to help stop the flow of hot oil. Given the chaos in the fields, even Thompson and Allred welcomed the help, as long as it was understood that they were not agreeing to cede control over Texas oil to the federal government.

The final draft of the NIRA implemented voluntary production quotas for the industry, with Ickes in place as petroleum administrator. It was more than most Texans wanted but less than they had feared. Federal court decisions had also begun to swing to the side of increased regulation, with federal courts upholding prorationing in the Panhandle and in the Conroe Field.

In September 1933, Ickes issued his first quotas, with the Railroad Commission in charge of carrying them out in Texas. He issued no price controls, saying prices would take care of themselves if supply was in line with demand. Enforcement of the orders remained poor. The commission had no access to refinery records to help track down violators. Even when hot oil runners were caught, the penalties were small. The Interior Department sent two units of additional agents to help with enforcement, but in a state the size of Texas they barely made a dent.

The Connally Hot Oil Act

Debate in the Texas House over the hot oil situation, 1934

In 1934, the Texas legislature passed three bills designed to strengthen the Railroad Commission’s ability to handle the continuing problems and stave off federal takeover. These bills authorized the commission to inspect refineries for hot oil, increased the production tax in order to pay for staff and other resources needed for enforcement, and made violating a Railroad Commission order a felony punishable by jail time.

The stronger enforcement efforts came none too soon. Ickes was disgusted by the repeated violations in Texas of production quotas. A bill was pending in Congress that would give Ickes sweeping powers over the industry. Even a conservative like Congressman Martin Dies called for its passage, saying he had seen “oil wells burning by the day … [and] oil running down the ditches.”

But most Texans opposed the bill. Sam Rayburn was able to get its consideration delayed while a congressional committee did an investigation into industry practices. The Cole Committee eventually recommended an interstate compact to enforce conservation laws, along with a national agency to study petroleum reserves, supply and demand, transportation, and production methods.

Meanwhile, federal and state efforts continued to combat the problem of hot oil. In October 1934, the Federal Tender Board (FTB) was formed. All oil producers, transporters, and refiners were required to submit affidavits with the details of their transactions, and all shipments of oil had to be cleared by the FTB. In spite of widespread fraud, this effort at forcing companies to keep open books, along with state efforts, brought hot oil shipments down from an estimated 100,000 barrels a day to fewer than 10,000 by the end of 1934.

In January 1935, the progress that had been made was almost undone when the U.S. Supreme Court declared the hot oil provision of the NIRA unconstitutional. With the end of federal penalties, it looked as if unrestrained production would once again become the norm in East Texas. To prevent this, Senator Tom Connally asked the Department of Interior to draft a new hot oil bill that would pass constitutional muster. The bill defined illegal petroleum as that produced or withdrawn from storage in defiance of state allowables and prohibited its shipment across state or national lines.

Commission orders for East Texas, December 1935

The Connally Hot Oil Act, passed in February 1935, gave the federal government the power to enforce the directives of the Texas Railroad Commission in interstate commerce.

Still to be determined was a means of enabling all of the oil-producing states to coordinate production. State governors and oil company executives formed the Interstate Oil Compact (IOC). The IOC aimed to stabilize the industry in the name of a steady supply of oil, predictable prices, and minimal federal interference. Each state would control its own production. Members of the IOC would have monthly meetings to review predictions of demand and establish production totals. Congress approved the existence of the IOC in August 1935.

The acceptance of the Connally Hot Oil Act and the IOC marked the end of the oil wars and the beginning of the era of regulation. The state-based controls of the IOC were reinforced by the demands of World War II. Aside from offshore regulations and environmental laws, the petroleum industry continues to be governed by the laws set down in 1935. In a testimony to the effectiveness of sane regulation, the East Texas Field, which was estimated to produce about a billion barrels of oil under the free-for-all conditions of the oil wars, was found to have more than five billion barrels of recoverable oil under regulated conditions.

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