Chapter One: Petroleum

Better late than never.

Come and listen to a story about a man named Jed,
A poor mountaineer, barely kept his family fed,
Then one day he was shootin’ at some food,
And up through the ground came a bubblin’ crude.
Oil that is, black gold, Texas tea.”

-The Ballad of Jed Clampett, by Paul Henning, theme song to The Beverly Hillbillies.



Chapter 1. The US and Oil

Ever since Edwin Drake struck oil near Titusville, Pennsylvania, oil has had a long-running, star position on the marquee of the US federal and state policy theater. Marked by periods of overproduction, shortage, crisis, and stability, oil has given presidents, governors, and the American public a show worth watching and is still grabbing headlines (perhaps even more so) into the 21st century.
When looking at any modern event or situation, it’s always a good idea to look at the history of that situation in order to understand what makes it what it is. Policy doesn’t happen in a vacuum and every legislator and executive in office today has to work either with or around the policies of those legislators and executives of yesterday. This chapter will focus on oil policy over the last 100 plus years. The goal isn’t to be exhaustive, but to outline the major trends and activities of oil policy to see how the country got to where it is today, and perhaps shine a speculative light on the future.

The History of US Oil Policy

Oil: The Early Years

August 27th, 1859, outside Titusville, Pennsylvania. Edwin Drake, general agent of the Seneca Oil Company is the first person to strike oil - when specifically looking for it. Prior to this moment oil had been found but was considered a nuisance, something to deal with when attempting to extract salt from domes under the earth. It wasn’t until a certain chain of events occurred that prospectors went looking for the black gold.
Before Big Oil, before the Middle East, and before there was “petroleum”, the main heating and lighting substance was whale oil. But when this finite resource was becoming ever more finite due to the near extinction of the sperm whale, and prices were skyrocketing, people realized they needed to find something else to warm and light their homes and businesses.
Some enterprising young people started extracting oil from coal and distilling the crude oil from the salt domes. Demand for this product grew because it was cheaper and less volatile than other options, including whale oil. Petroleum also began to be used more and more by the textile mills that spurred the Industrial Revolution as a source of lubrication for the machines. By 1858, demand for oil was high, going for up to $2.00 a gallon in some places.
The low price, coupled with a report by a Yale professor about the economic potential of crude oil, set the stage for one of the first oil companies in the US (which commissioned the Yale report) to garner funding and commence drilling. Coming to be known as the Seneca Oil Company, it hired Edwin Drake to begin drilling in an area of Pennsylvania that for centuries had provided oil to natives and settlers alike.
On August 27, 1859, at a depth of 69 feet, Drake and his crew quit drilling for the night. The next day they returned to discovery black crude floating on the water that filled the hole of the shaft they had drilled. It was this success that started the modern oil industry, “by demonstrating that a dependable supply of petroleum could be harvested by drilling. [Drake’s] persistence and his adaptation of salt well drilling technology opened up the Pennsylvania oil fields.” The same basic principles of drilling are used today, meaning Drake actually opened up the world to oil.
This accomplishment started the Age of Oil. In the early years, oil wasn’t a central aspect of the US economy. Machines were mainly driven by steam or water power and the major modes of transportation were shoe leather and horseback. The federal government had little to say about oil production and sales, as is evidenced by the rise of Standard Oil, the monopoly power in the oil business by the late 1800s.
Thus, for these years it can be said that oil had great potential. It wasn’t until around 1890 that the potential started to turn kinetic. Due to technological advancements in industrial and consumer goods, population growth, and rising incomes, the oil industry and the nation were at a critical point that opened the government’s eyes to the need for a concrete national oil policy.
1890s to the Great War
Petroleum didn’t gain national prominence in the US until the very late 1800s. Prior to this, demand was relatively low due to lack of technologies that depended on oil and relatively low industrialization. But by 1890, the Industrial Revolution had become part of the establishment, the Otto and Diesel engines had been invented and were being used, and populations were booming in the industrial centers, all of which increased demand.
In 1899, 12 million barrels of fuel oil were sold in the US. Twenty years later the number had risen to 242 million barrels. Some of the increase came from people heating their homes and industrial applications, but the great majority of this fuel went to marine and rail transportation, which had made the switch to more efficient diesel engines.
It was this great leap in demand and production that brought to light the problems underlying the industry and caused the government to take action. Of greatest prominence in this period were monopolies, waste, and military need. Indeed, these three problems were to be the major players shaping oil policy for the next half century.

Monopoly

By 1890, John D. Rockefeller’s Standard Oil of New Jersey had gained a majority share of the US market, controlling roughly 90% of the refined oil market. It was said that if you needed to ship oil, you needed Standard to do it. Also in 1890, the Sherman Anti-Trust Act passed the Congress, making it illegal to conspire to restrain or monopolize trade or commerce, and giving the Department of Justice the ability to prosecute offenders of the law.
It wasn’t until Teddy Roosevelt was in office and the era of New Nationalism that the Sherman Act was used to its fullest extent. New Nationalism was a diversion from the laissez-faire policies of the past, it recognized the economic concentration that was inherent in industrialism and sought to place federal controls on the operations of industry in order to protect the rights of labor and consumers. Although Roosevelt wasn’t using this terminology when he was in office, he was none-the-less acting out its tenets, in which lay the seed of the modern American welfare state.
Thus, in the interests of the people, the government sought to regulate how much of the market one company could control. Through the early 1900s, many states, fed up with Standard’s practices, filed suit against them to stop their operations. Kansas attempted to build a state owned refinery to counter Standard’s sole refinery in the state and Texas passed numerous laws that eventually barred any Standard affiliate from operating in the state.
Spurred on by these actions and by popular press personalities like Ida Tarbell, the federal government took up the cause and filed suit against Standard Oil under the Sherman Act. In 1911, the Supreme Court decided Standard Oil was in violation of the Sherman Act and ordered the dissolution of the company, returning control of stock to 37 of it affiliates. Interestingly, by the time Standard was dissolved by court order, the percentage of the market they controlled had fallen to roughly 65 percent, mostly because it was too large to take advantage of new markets and technologies.
Waste, Conservation, and Prices
In any new industry, when the first person or company proves themselves to be successful, there are always a slew of others who jump in right after them. This is what happened with the oil industry in the late 1800s. There was no regulation of the industry and people were becoming rich overnight, most literally (remember Drake). This led to a rash of exploration with people drilling holes like Swiss cheese. The natural result was incredible amounts of waste as new gushers spewed oil on the ground before drilling teams could cap them, and an excess of supply leading to depressed prices as producers shoved their product on the market.
It wasn’t long before warnings of impending depletion were being sounded. As early as 1879, states were paying heed to the warnings of geologists and passing laws for the capping of wells. Many states passed laws regulating the drilling and operation of oil and some even formed special divisions of state agencies to manage them, like the State Natural Gas Supervisor in Indiana. These warnings were renewed throughout the next century but it wasn’t until the 1950s that an accurate warning would be given.
Depletion, combined with overproduction and subsequent low prices, caused the Oklahoma legislature to enact drilling regulations in 1905. Later, the state inaugurated the power to enforce the laws which were often ignored by producers. After the glut had dropped the prices so low that producers petitioned the government, they passed a minimum price law of $.65 per barrel for oil from a new field. They also passed a regulation making pipelines public property to end trust activities and later, passed the first law in the nation regulating the amount of oil production to stabilize prices.

Military Need

The fear of waste and depletion led the federal government to pursue reservation of federal oil lands for its own use. In 1909, President Taft signed an executive order setting aside millions of acres in Elk Hills and Buena Vista Hills in California, and Teapot Dome in Wyoming, to preserve for federal use.
What brought this about is the internal combustion engine. The Navy, under orders from its Secretary, had been converting its fleet from coal to diesel power throughout the turn of the century. By1913, demand was sufficient across the nation that the Navy’s fuel bill had increased by 50 percent over the previous year due to increasing prices. With its new dependence on petroleum, increasing prices, and the warning cries of depletion, it was seen as a matter of national security that a reliable source of oil be available. The military would also play a prominent role in oil policy during and after World War I.

The Great War

World War I was the first major conflict that depended heavily on mechanization. The Navy depended on oil to run its ships, the Army had armored trucks and tanks, and there was even a small Air Corps that needed aviation fuel. Because of the demand for oil, the Wilson administration took a very different track in oil policy during the war years. While conservation was still key to ensure a steady supply for the military, gone were the trust busting days and limits to production. Maximum production coupled with closer cooperation within industry and between industry and the government were the hallmarks of this era.
The Lever Act of 1917 gave President Wilson broad wartime powers, which he used to create committees and agencies for the regulation of natural resources. The National Petroleum War Service Committee was implemented to bring together figures in the oil industry to better organize national oil production across the country, impossible under previous anti-trust laws. Also formed was the Oil Division of the United States Fuel Administration, an agency given powers to regulate production and marketing of oil. The two, combined, fostered the new policies of greater regulation of large oil interests and cooperation between industry and government.
The administrator of the Oil Division issued commands that the War Service Committee was then to implement. As the administrator was respected by the oilmen that made up the Committee, the commands were generally followed. The Administrator fostered cooperation among producers and refiners to increase production of valuable oil. He also ended private contracts that created a pool of oil supplies from which the government would draw when needed. Also, through standardization of processes and self-imposed price regulations, the two agencies were able to maintain low prices in the face of increasing demand. The final major work of the war time agencies was in conservation. The Oil Administrator implemented a liberal depletion allowance, which allowed companies to deduct from taxes their discovery costs or the market value of their property. This would provide greater incentive to find new sources of oil and thus increase production. Thus the shift was made from competition to coordination, with the federal government having greater control over the industry.

The Roaring ‘20s and the Great Depression

1920s

The post-war era into the 1920s saw an expansion of the oil industry into foreign territories. Left to their own devices after the dismantling of the wartime apparatus, oil companies were once again causing problems with prices and supply. Given projected growth in demand for oil, and another prediction that oil would run out in a decade, foreign sources were seen as essential to maintain supplies in the US.
This prompted the federal government to ramp up its diplomatic efforts, under an Open Door policy, with foreign nations in the Middle East, Indonesia, and South and Latin America. The Open Door policy, originally intended for China, stated that all nations should have equal access to foreign markets. In the case of China, the US was afraid other powers would divide the country up and wouldn’t be able to trade there any longer. In the case of oil, the US wanted access to the plentiful fields in the Middle East and Indonesia, access it was not granted.
The British controlled much of the Middle East at the time and the Dutch controlled Indonesia (Dutch East Indies). Neither country would acquiesce to US demands in this period until the mid-1920s, when large finds at home decreased the need for these foreign sources. Where the US did have success in these years was in South America. In both Colombia and Venezuela, State Department efforts were fruitful in helping to win oil exploration and drilling contracts with the national governments.
By 1924, however, everything changed again. Fears of impending oil depletion in the United States were squashed as major oil fields were discovered in Texas, California, and Louisiana. Once again there was overproduction and waste occurring as producers tried to shove their new finds into an already full market, which led to yet another prediction of depletion in a decade and cries for conservation. Most importantly, the demand for oil for military purposes was growing along with the air fleet and mechanized ground forces, making oil even more important for national security.
Calvin Coolidge, on the run after the Teapot Dome scandal, in which Harding’s Secretary of the Interior Albert Fall received $400,000 in kickbacks for opening the naval reserves to Sinclair Oil and Pan American Petroleum in no-bid contracts , created the Federal Oil Conservation Board (FOCB), “…for the patent fact that the oil industry welfare is so intimately linked with the industrial prosperity and safety of the whole people, that Government and business can well join forces to work out…practical conservation.” Set up as an investigative agency the FOCB recommended legislative and industry action to promote conservation and stabilization.
Some of the actions to come out of the FOCB were an across-the-board depletion allowance of 27.5 percent for all oil wells (previously it had been decided well by well), garnering support among industry leaders for efficiency and conservation, and a gradual acceptance that production quotas would be beneficial to the industry. While the FOCB had no teeth to implement changes, it was instrumental in shifting opinion from maximum production to conservation.

The Depression

Herbert Hoover ushered in the worst economic times of American history. Hoover’s belief that people should “pull themselves up by the bootstraps” carried over to the oil industry by stating it should voluntarily regulate its own business without the help of the federal government. This was backed by a weak stance on anti-trust activity. That is, he did nothing to act on his previous rhetoric that the Sherman Act should be modified to allow cooperation. He favored industry cooperation, but did nothing to make it legal and problems only turned worse as divisions between independent and large, integrated producers worsened and the largest oil field discovery in the US came to pass.
Production was already up 10 percent over the previous year in 1930 dropping the price of a barrel of oil to $0.75 while the market was shrinking. In 1931, the East Texas Oil Field was discovered which added a glut of oil to an already drenched market and sent the price per barrel to $0.10. Voluntary measures to control production collapsed shortly after commencement and Hoover still did nothing. After many attempts and with pressure from industry, the Congress passed a one dollar per barrel import tax to reduce foreign oil sales. This helped but was essentially a band-aid on a gaping wound.
Thus, During the Great Depression, states took the front stage in activity to control oil production. As an example, in Texas, the Railroad Commission (TRC) was given enforcement powers and passed resolutions to prohibit waste and stabilize production like spacing wells 40 feet apart. In 1930, the TRC passed its first prorationing rule, limiting the amount of production at wells. Then the East Texas Oil Field was discovered, producing more oil than the rest of Texas and lowering prices to almost nothing (SUV drivers would drool). The Commission attempted to control the oil flowing out of East Texas but the producers there ignored it.
Thus, in August of 1931, the mounting crisis caused Governor Sterling to declare martial law in East Texas. 4,000 militia men were sent to the area to maintain the production of oil at 400,000 barrels per day. The price of a barrel had risen to $0.85 by mid-1932, showing the plan effective. But in May, 1932, the Federal District Court for East Texas declared martial law illegal stating the Governor had no authority to control oil production. Governor Sterling ignored the court. However, also in May of 1932 the Supreme Court decided in favor of prorationing to prevent waste in an Oklahoma case. Texas laws were changed to meet the wording of the decision and the TRC continued its programs.
The leading piece of policy in Franklin Roosevelt’s Depression years was the Connally Act, which prohibited sales of “hot oil” across state borders. Hot oil was oil produced beyond proration limits set by the states. Up to 500,000 barrels of hot oil were being shipped per day and stemming this flow stabilized the industry to a great extent.
Roosevelt also created an Oil Administrator under the National Industrial Recovery Act (NRA). The administrator had the power to,
determine monthly production quotas upon recommendations made by the Production and Coordination (P&C) Committee. He also received authority to restrict oil imports to an amount equal to that of the last six months of 1932. At the same time the administrator could issue regulations for the marketing of refined products, and if necessary, for price regulation. Also under his jurisdiction was the administration of labor provisions…
This power proved fruitful until mid-1935 when the Supreme Court struck down the NRA, in contradiction to the desires of the government and industry. The Interstate Oil Compact became its successor which, with the Connally Act, proved useful in regulating conservation and stabilization in the oil industry.

World War II and Post War America

WWII

Conservation was once again thrown out the window as the nation geared up for war. While waste was looked down upon, maximum production was desired as in World War I. One of the first acts during the war was a lasting shift from sea to land transportation. German U-boats in the Atlantic were sinking ships rapidly, leading to shortages in fuel oil to the Northeast. Harold Ickes, Secretary of the Interior, managed to convince industry to switch to rail and truck tankers and to pipelines that were built under his insistence, the Little and Big Inch. This switch was radical at the time but took root and is the main way oil is transported today.
In 1942, Ickes was appointed Petroleum Administrator for War (PAW), with powers to govern “production, transportation, and distribution of petroleum. His agency was instructed to develop necessary policies to increase production by fostering improved conservation practices, by encouragement of drilling, or by changing consumption patterns.” To do this, the PAW encouraged drilling by procurement of drilling equipment and publishing potential areas, and the advancement of technology by signing long-term contracts for aviation fuels, improving blending techniques, and spawning sub-industries like synthetic rubber. Office of Price Administration was charged with the regulation of prices during the war serving to maintain reasonable prices for the government. Thus, it was the war that led to the transformation of the oil industry with improved techniques, better transportation, and well defined controls of the industry by government, allowing the US to supply 80 percent of Allied needs throughout the war.

Post War

Post war policy saw an end to the war time agencies as well as an end of anti-trust activity. It was clear by now that cooperation was vital and that the federal and state governments could adequately regulate the industry. Four principles outlined Truman’s time in office, a) nationalization of the oil industry was not needed or warranted, b) tax relief to encourage drilling should continue, c) conservation should be encouraged, and d) federal policy should encourage overseas development.
The Korean War saw many of the WWII type policies re-implemented. Truman created a Petroleum Administration for Defense (PAD) whose major goal was to secure aviation fuel by integrating government officials and industry in cooperative procurement programs. Most interesting, it was during this time that the first affects of interdependence were felt when oil flows from Iran were disrupted because of nationalization efforts. This event shortened the needed supply and sent the PAD scurrying to suspend anti-trust laws to once again allow pooling and promote drilling.
Eisenhower saw to the dismantling of the PAD shortly after Truman left office. His administration was noncommittal to the issue of oil policy, preferring Hoover’s approach of voluntary cooperation. The major legislation that passed during his time had to do with offshore availability of mineral rights. Prior to 1953, all offshore rights belonged to the federal government. In May of that year, the Submerged Lands Act passed which gave the states mineral rights in the tidelands within three miles of the shore. A later bill, the Outer Continental Shelf Act place lands outside the three mile limit exclusively under federal control.
The 1960s saw an extension of Eisenhower’s hands-off approach to the oil industry. It was felt that the policies of the early post-war era were effective enough that no new controls needed to be in place. This is simultaneously a testament to Roosevelt and Truman’s ability to find a balance between government regulation and free enterprise, and a nod to the focus of the 1960s on international affairs and diplomacy.

1970s: Crisis

September 14, 1960, Baghdad, Iraq. The five nations of Iran, Iraq, Kuwait, Saudi Arabia and Venezuela meet to form the Organization of the Petroleum Exporting Countries with the goals of unifying petroleum policies, stabilizing world oil prices, and providing an efficient, regular supply of oil. For the next decade, their ability to control world oil prices is weak.
In 1970, however, the US reached maximum production capacity and is no longer able to control prices by tweaking production in Texas. Combine this with Nixon’s Economic Stabilization Program, which froze prices of previously discovered crude oil, thus discouraging increased domestic production, and the stage is set for the oil shocks of 1973 and 1979, which proved a radical turn for oil policy in the US.
In October 1973, OPEC placed an embargo on allies of the Israelis during the Arab-Israeli war. The embargo was followed by a 25 percent reduction in production and another five percent reduction a short while later. This sent the price per barrel of Saudi oil from $1.39 in January, 1970 to $8.32 in January, 1974 (~$6.60 to $31 in constant 2003 dollars ). In 1979, the Iranian Islamic Revolution took place which disrupted oil supplies as the Ayatollah took over from the Shah. While production only decreased by about four percent, reaction was greater with another shock that had oil prices climbing to a high of around 39 dollars per barrel (~$80 in 2003 dollars).
In both cases, long lines at the tanks ensued and 1973 saw a consumption policy instated that had cars with even numbers as the last digit of the license plate filling on even days and odd numbers on odd days. Some long lasting policies implemented due to this shock were the national 55 mile per hour speed limit, yearlong daylight savings time, Corporate Average Fuel Efficiency (CAFE) standards, the Department of Energy, and the Strategic Petroleum Reserve. Also important to note, were environmental concerns and Carter’s emphasis on finding alternative sources of energy.
The 1970s marked yet another major transition in US oil policy. Peak oil production had come in 1970 and the country for the first time became dependent on foreign sources to meet demand. The two oil shocks proved just how dependent the nation could be. Because increasing domestic production was no longer an option and foreign sources couldn’t be depended on, it was the first time that national policy centered on reducing consumption, a policy that would have had the public mystified only a decade before.

The 1980s and Beyond

The 1980s saw a decrease of OPEC’s power and stabilization of oil prices. The Reagan administration ended price controls and adopted a free market attitude to oil. Reagan’s attitude can be seen in the Department of Energy’s budget for research. In 1980, conservation spending totaled 779 million dollars; by 1983, it was 22 million dollars. He also revoked many of the anti-trust regulations which spurred a flood of mergers into the mid-1980s. There was also a shift in policy to using economic and military force, when warranted, to secure petroleum for national military and economic security, as evidenced by the Iraq wars. Thus, Reagan’s policies countered almost 80 years of precedent in oil policy, with relatively benign results. As of 1986, prices had decreased to a sustainable level with further decreases through the 1990s.
As for the 1990s and 2000s, much of the same was seen out of what was wrought in the 1980s. Further attempts to decrease consumption were attempted, but with relatively low oil prices (~$10 per barrel in the late 1990s, pre-embargo prices), there wasn’t much incentive. The 1990s saw some of the lowest relative prices for oil in the history of the country, at a time when demand was increasing rapidly due to SUVs and a booming economy. Today, in the 2000s, the US is once more at war with Iraq, under different premises, but in many peoples eyes it’s because they sit on top of the second largest untapped oil reserves in the world, which points to a continuation of Reagan’s policies.

Conclusion

The history of oil policy in the United States is diverse and interesting. From the early years of laissez-faire capitalism, to Roosevelt’s New Nationalism, the strong government controls of the inter-war period, to the free markets of the end of the century, oil policy has seen its ups and downs but has always centered on a few main questions. What role does government have in creating policy to regulate oil production? Should the policy encompass conservation of resources? How competitive will the markets be? How can we ensure our national security which depends on oil?
Many of these questions are still prominent among policy makers at the national and state levels and it is likely they will remain relevant for years to come. This leads one to ask the question, “Where do we go from here?” In part, the purpose of this paper is to answer that question. In light of recent forecasts and military actions, it is time to start exploring alternatives to petroleum for powering our lives. Is it worth securing Middle East oil fields if the cost in human lives and national spending (let’s not forget all the oil the military consumes) outweighs the benefits? Or is it better to find alternative products to oil that can be made here in our own country? To answer these questions at least in part, the next section will analyze certain aspects petroleum.