PETER: The story of Standard Oil is a story about controlling production, but only to a certain extent. You see, John D. Rockefeller’s vision of the oil business focused on the middle man, the refiners. Controlling the actual extraction of oil, even Rockefeller wasn’t bold enough to try that. And part of the reason why has to do with what’s known as the rule of capture.
ED: Now the rule of capture basically amounts to finders keepers. The idea being that oil belongs to whoever managed to extract it, or capture it, from the ground, even if it comes from under someone else’s land. The rule dates back to English common law and disputes between landowners and hunters about wild game.
The reason it was applied to oil extraction was because scientists in the middle of the 19th century thought that underground oil behaved like a wild animal. It could migrate from here to there. And so it couldn’t easily be assigned to one landowner or another.
PETER: The upshot was that rapid extraction was incentivized. If you didn’t drain the oil under your own land, a neighbor, who could also get at that coil through an access point on his land, could drain it himself. Over the years, the rush to extract oil as quickly as possible resulted in untold environmental degradation. But it also resulted in a kind of democratization of oil business. All you needed to do to get in on the action was get your hands on a drill and secure the rights to the few hundred square feet needed to set that drill up. It was known as wildcatting, and for decades, the mythology of the wildcatter loomed large in American’s imaginations.
BRIAN: In 1926, a 70-year-old wildcatter named C.L. Joiner showed up in East Texas. He had with him a rusty rig and a pitch for investors. Geologists working for the big oil companies had already decided that the region was dry, but Joiner wasn’t convinced. He raised enough money to drill one dry well and then another. But in 1930, his third well hit the jackpot. He had tapped into what remains to this very day the largest oil field in the lower 48. Matthew Huber is a professor of geography, who sat down with me to explain what happened next. Almost immediately, legions of prospectors streamed to the region to sign land leases with the poor farmers there, and oil started flowing like crazy.
But, and here’s the twist, profits didn’t follow. To put it simply, the market was flooded with oil. Prices were already low thanks to the depression, and this new glut of oil sent prices through the floor. Huber says that people were actually losing money.
MATTHEW HUBER: And so the producers are on the brink of bankruptcy. The farmers who had signed these oil leases are receiving minuscule royalty checks. This kind of dream of instant oil love very quickly turned to chaos and anger, and people very quickly realized there needed to be some mechanism to stop this oil production. And that’s where you start to see people threatening violence on pipelines, because if you blow up the pipelines, there’s no way to get the oil to market. You start to see threats coming out that people were going to literally hang people, and that kind of vigilante type of violence to stop people from producing oil.
BRIAN: But of course the first instinct of a producer, when his price drops, is to produce more to make up for it, right?
MATTHEW HUBER: Absolutely. So everyone’s trying to produce more to make up for the less money they’re getting per barrel, and that exacerbates the problem.
BRIAN: So on August 16, 1931, Texas governor Ross Sterling took action. He declared martial law and called out the National Guard to enforce strict limits on how much could be pumped from the ground. I asked Huber whether this worked.
MATTHEW HUBER: It did work for a time. And interestingly, people were very appreciative. Unfortunately, refiners were not so happy. They were thinking what’s going on here. We have the governor imposing martial and raising the price of our prime input, so they sued the state of Texas. And eventually, in 1932, the federal courts declared the imposition of martial law unconstitutional. And that essentially lifted this control mechanism, and the flood sort of recommenced. And by the time FDR comes into office, the crisis conditions have pretty much gotten back to where they started.
BRIAN: FDR’s Interior Secretary, a guy named Harold Ickes, took the crisis in the southwest extremely seriously. He saw overproduction as a national problem that demanded a strong, sweeping, national response.
MATTHEW HUBER: Ickes was, and his letters to Roosevelt, talking about how he wanted to become an oil dictator. I even read a letter to FDR that was talking about how Mussolini had done some wonderful things with oil in the Italian Navy and that we should look at that as a model.
BRIAN: Icke’s vision of converting oil into a federally run utility didn’t meet with much enthusiasm on the part of states’ rights types. In the end, control of the industry was left to the state agencies. In the case of Texas, state’s Railroad Commission. Over the next several years, that commission instituted something called pro rationing, whereby monthly quotas, or allowables, were issued to every well owner in the state. As for the idea of a national solution, Huber told me it didn’t disappear entirely.
MATTHEW HUBER: What the federal government did do is create what was called the Interstate Oil Compact Commission, which was a handful of states: Oklahoma, Texas, Louisiana Kansas, Illinois, other oil producing states. And they would come together, and meet, and study the conditions of the national market to try to coordinate how much oil should be produced. The other important part of this story is the federal government had the Bureau of Mines project on a month by month basis how much oil was demanded by estimating how many cars there were, and how many heating oil units, and various sort of statistical methods for projecting this.
And those projections became the kind of basis for which Texas and other states determined how much should be produced. So what they were trying to do is, again, align production so that it did not exceed projected demand.
BRIAN: So Matt, forgive me for jumping ahead, but we’ve got state mechanisms for issuing allowances. We’ve got the states cooperating with each other through a regional council. And we’ve got estimates of demand so that the allowables, as you put it, are tailored to keep the price steady or increasing, given that demand. Can you spell OPEC?
MATTHEW HUBER: Exactly. Yeah, and in fact, it’s very clear that OPEC was founded in the early ’60s. And they studied, particularly, the Texas Railroad Commission, and the very eloquent way in which they were able to coordinate this incredible system of production management to keep prices stable and increasing.
BRIAN: These days, we tend to talk about oil as a kind of precious resource that needs to be conserved. In a few minutes, we’ll hear more about what happened in the 1970s to usher in that way of thinking. What this story shows us, Huber says, is that at least when it comes to oil, scarcity is an idea that kind of has to be invented.
MATTHEW HUBER: If you look, again, at not just the 1930s, but the whole history of oil, you really find that the real menace for the industry and states that control oil is abundance, and not scarcity. And that scarcity actually has to be actively managed by sets of institutions like the Texas Railroad Commission, like OPEC, to create the scarcity needed for profitable forms of accumulation in those particular industries.
And what’s really striking about this history, again, is that you find it’s really quite difficult to manage those forms of scarcity. OPEC was quite successful in the 1970s, and they raised prices fourfold, but by 1986 OPEC was in disarray, and the price of oil had collapsed to about $8 to $10 a barrel.
And this was inflicting horrible suffering, again, on the independent oil producers in Texas. And it forced George H. W. Bush to travel to Saudi Arabia in 1986 to beg Saudi Arabia to stop producing so much oil, again, on behalf of the oil industry, which he is known for being friendly with. Ironically, OPEC in the ’80s and ’90s was probably less successful than the Texas Railroad Commission in the ’50s and ’60s at managing this scarcity.
BRIAN: That’s Matthew Huber, a professor of geography at Syracuse University. He’s the author of Life Blood: Oil, Freedom, and the Forces of Capital. It’s time for another short break. When we get back, how the year 1973 changed everything we know about oil.