THE STATES ACT FOR OIL CONSERVATION
IN APRIL, 1931, a group of oilmen styling itself the Oil States Advisory Committee, composed of representatives of the governors of 10 oil-producing States, appeared at its own request before the Federal Oil Conservation Board in Washington. This board was created by President Coolidge to study oil problems and is composed of four Cabinet membersthe Secretaries of War, Navy, Interior, and Commerce. In asking for a hearing before the board the committee stated that its purpose was that of "developing plans under which we may stabilize the industry." It had passed resolutions looking to that end at a previous conference held in Texarkana, Tex.
The committee called attention to the necessity for the elimination of waste of an irreplaceable resource, to prevention of the threatened forced abandonment of hundreds of thousands of small wells throughout the oil-producing areas of the United States, to preservation of the independent oil-producing areas of the United States, to preservation of the independent oil operator as a competitive force, thereby avoiding the creation of monopoly, and to the prevention of loss of many millions of dollars in tax revenues to the various States and to the Nation. It cited the fact that no individual oil-producing State, by its own laws, can adequately protect the national interest against such conditions of over production, attendant waste, and resultant demoralization of a great industry, as now exists, unless the conservation efforts of the large producing States shall be coordinated. Unless there is curtailment, it argued, efforts within one State may at any time be automatically offset and nullified by increased flush production in the fields of another State, to the great damage of the areas of old and settled production throughout the country. Through bitter experience, it stated, the various oil-producing States have been forced to the realization that the conservation authorities of each State must give due consideration to the general situation in the oil industry throughout the United States. With such consideration duly given, it said the stabilization of the production of crude oil within any State is purely a problem for solution by that State and the industry therein, with such cooperation and advice as may be rendered by interstate advisory committees and with such aid and assistance as the Federal Government may be able to give.
The committee had definite proposals to submit. They came at a fortunate time. There had long been over production in the oil business. So much oil had been produced that prices had steadily declinedhad decreased from around $2 a barrel two years before to prices below 50 cents a barrel. Discoveries and developments had come so fast that at that time there was a potential daily production several times as great as the demand. Uncontrolled production had meant great damage to the industry and inconceivable waste. Oil had become a national problem because of its universal use, yet it was produced in but 19 States. Of these 19 the lion's share came from three States. In 1930 Texas had produced 32 per cent of the oil of the Nation. The oil produced in Texas alone equaled that produced in all the world combined outside of the United States. Oklahoma produced 24 per cent of the Nation's oil and California 25 per cent. Thus three States yielded over 80 per cent. Add to these three, four more StatesKansas, Arkansas, Louisiana, and Wyomingand we have seven States producing 97 per cent of the oil. All of these and three additional StatesNew Mexico, Ohio, and Colorado were in the group represented on the Oil States Advisory Committee. Thus they represented the State governments of practically the entire oil-producing area.
The proposal of primary importance on the part of the committee was one that "the legislature of each oil-producing State be requested as rapidly as possible to authorize negotiation of an interstate agreement for coordination of conservation measures, any such agreement being subject to ratification by the States."
The Federal Oil Conservation Board gave this recommendation its general approval.
Carrying out this program meant the drafting of a 10-State compact calling for cooperative action in control of flow from oil wells and for uniform legislation against waste of gas and overdrilling. State compacts are by no means new. Over 50 of them have been authorized for one purpose or another, that of the Colorado Basin States, which preceded the erection of Hoover Dam and the storage of the Colorado's flood waters, having attracted most attention.
Representatives of the oil-producing States, under this program, were to draft an interstate compact providing for methods of determining requirements and allocation of production and to meet the various problems in which the States have mutual concern. When agreed upon the compact should be submitted to the various State legislatures for their approval and finally to the United States Congress. When these approvals had been secured it would be ready to function. The chief job of agencies which it created would be to find out, year by year, how much oil would be needed and to see that there is fair play among the States. It might be found, for example, that 1,000,000,000 barrels were needed for 1933; that billion barrels would be distributed among the States on the basis of the best engineering and economic information available.
A second recommendation of the Oil States Advisory Committee that was approved by the Federal Oil Conservation Board was one to the effect that "the Federal Oil Conservation Board continue its voluntary committee on economics, to make periodic examinations into the status of the oil industry and formulate national and regional forecasts of supply and demand, and that such forecasts be given due consideration by the interstate committee and recommended, with any necessary modifications, to the respective State conservation bodies."
Such voluntary committees had been estimating requirements in this way from time to time and had shown the practicability of such estimates. Whether or not this voluntary committee continued to serve this purpose or some other agency was created to make these requirement estimates rested with the framers of the interstate compact. This estimate, however, was the foundation of subsequent procedure and therefore an important step in the whole program.
>The manner in which this voluntary committee on economics of the Federal Oil Conservation Board worked may be illustrated by the way it estimated requirements for the six months beginning April 1 and ending September 30, 1931. This committee, after weighing every obtainable element that entered into the situation, concluded that "the domestic demand for gasoline will exceed that of the preceding year during June, July, and August, and that April, May, and September domestic demand will not equal the 1930 levels. * * * Domestic demand during the 1931 period is estimated by the committee at 228,800,000 barrels, an increase of 1.5 per cent over the domestic demand of 219,589,000 barrels during the same period of the preceding year. * * * The committee estimates that gasoline exports from the United States during the period under consideration will total 29,200,000 barrels, a reduction of approximately 5,300,000 barrels from the comparable 1930 total of 34,519,000 barrels. The summation of domestic and foreign requirements indicates that the American oil industry, during the period under consideration, should not anticipate a total motor-fuel demand in excess of 252,000,000 barrels, a decline of 0.8 per cent from the comparable 1930 figure of 254,108,000 barrels."
Weighing the various probable demands the committee concluded that the Nation would need to produce from its wells in that six months 461,434,000 barrels of crude oil. If equitably distributed, the committee said that oil could be produced as follows: Texas, 162,641,000 barrels, or 35.25 per cent; Oklahoma, 113,340,000 barrels, or 24.56 per cent; California, 96,624,000 barrels, or 20.94 per cent; all others, 88,829,000 barrels, or 19.25 per cent. Thus it would seem that a voluntary committee was giving a practical example of what was later to be required of an official committee.
When, under this plan, necessary production had been determined and when that production had been allotted among the States there would remain the final not-over-easy task of administering production within the several States. If a State was capable of producing ten times as much oil as was allocated to it, the demand for shares in that production on the part of the different owners of oil fields and oil wells would, of necessity, be intense. Allocating that production among the oil people would logically and naturally fall to the lot of State utility commissions.
A third recommendation that the Oil States Advisory Committee made had in mind a makeshift for influencing the problem of oil production and allocation pending the necessary steps in establishing an authoritative and permanent agency. It said that "pending the working out of such a compact, an advisory committee, representing the several oil-producing States, should continue to function as a liaison and fact-finding body, to present to the conservation authorities of the various States, at such times as may be deemed necessary, recommendations for more effective cooperation as between the States." This contemplated the continuance until other machinery could be established of the already existing Oil States Advisory Committee.
Yet another respect in which the Oil States Advisory Committee was in entire accord with Federal authorities was in recommendation that, under organized control of production, all new fields should be developed on the unit-operation plan following the scheme worked out, largely through Government influence, at the Kettleman Hills field in California, but privately applied also elsewhere. This unit plan for developing and producing oil fields had long been a favorite theme of the oil conservationists, and its application to new fields would mean much to the oil industry. As a matter of fact, the limitation of production by the States tended toward unit operation and therefore would exercise a tremendous influence toward the avoidance of waste.
Each of these steps presented problems that were vital, dynamic, and almost without precedent of comparable magnitude. The problems involved were more closely akin to those handled by public-utility commissions than any other agencies of government, although the oil-production business was not a public utility and there was no intent in the Advisory Committee's plans to make it one. Since an organization was to be set up for cooperative action that was the creature of 10 States it was assumed that efforts would be made to bring about uniformity of action among those States.
The steps that had previously been taken by individual States looking to a control of oil production had been quite without any degree of uniformity. In California, for example, the State exercised pressure under a law which aimed at the conservation of gas, administered by a director of natural resources and a supervisor. In Texas the regulation of production fell under the railroad commission. In Oklahoma regulation found its basis in a 16-year-old law which created an oil and gas department of the corporation commission.
The sum total of result in this situation aimed at was that the States should exert their authority to regulate oil production, that they should themselves be responsible for holding production down to the point which would prevent waste, and that working out this detail of control logically would lead toward unit operation and practical conservation. Arrival at that conclusion and preparation for making it a reality seemed to be the most direct approach that had been made to a solution of the dominant oil problem. Again the Federal Oil Conservation Board gave its approval.
And in September, 1931, the proposed compact was actually, if informally, receiving a test. The Corporation Commission of Oklahoma, the Railroad Commission of Texas, and the Public Service Commission of Kansas met with the Oil States Advisory Committee at Oklahoma City on September 11. It agreed on an allocation of mid-continent production closely following the demand forecast by the Federal Oil Conservation Board's economic committee. That allocation was 902,000 barrels daily for Texas, 546,000 for Oklahoma, 110,000 for Kansas. An informal one-page agreement to these allocations was signed by representatives of the thee States and their commissions, and California, Wyoming, New Mexico, and Colorado signified their adherence. Thus for the first time in the history of the industry was coordination between production in the States brought about.
Much of this could be traced back to a date in 1929, when the Hoover administration had been in office but a few weeks. Producers of oil assembled in convention in Houston, Tex., passed resolutions which proposed that oil production for 1929 be limited by them to that of 1928. They came to Washington and asked the approval of the Federal Oil Conservation Board to this plan for action by the industry to limit production. That board asked the Attorney General if it had the authority to grant such an approval. The Attorney General said that the board had no such powers and that the request would not have been made had those making it not realized that "under existing laws such an agreement could not safely be made without the sanction of some official of the United States. * * *" The producers' way out was thus blocked. It was at this time that the Federal Oil Conservation Board suggested that the proper approach to limitation lay through State action.
In June of the same year a conference on oil production was held in Colorado Springs and the Government's position was expressed in a statement which said that "the oil industry faces a difficult and complicated situation which can only be met by a spirit of cooperation. Primarily, the responsibility for the handling of this oil problem lies with the industry and with the governments of the States. The position of the Federal Government is not to interfere with the rights and duties of the local State governments but to lend such aid as it can and to participate in the solution of the problems. This administration has no desire to concentrate the forces of government in Washington. It has every desire to cooperate with the States. The aims sought are uniformity of the conservation legislation and the uniformity of enforcement by some body, such as a joint commission. This could be created by a simple compact of the States ratified by Congress."
The industry was not at that time ready to come to this view of the problem. The possibilities that lay in action by the States were not then generally appreciated. When two years had passed, however, State action was admittedly the proper course in solving the problems of oil production, and strenuous action was being taken at many points. Great credit is due the various State officials in undertaking this difficult but essential experiment.
Last Updated: 20-Jul-2009