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Background of the Oil Majors’ Texas Power ’32 and when ‘ Texas Governor Ross Sterling, a founder of Humble Oil and Refining Co., declared martial law in East Texas and shut in production, triggering the ‘main event in the long, bitter, and ultimately futile fight of independents against proration. National Guardsmen roamed the fields and refineries, enforcing what the Governor called “conservation” and some independents called “organized thievery.’ ” Enter Elwood Fouts, known to latter-day Texans as the founder of the ultra-conservative political organization called Freedom In Action, but in those days an articulate legal spokesman for Texas independents. ‘Corporate Aristocracies’ Appearing before the Interstate and Foreign Commerce Committee of the U.S. House of Representatives in November, 1934, Fouts delivered a ringing declaration against monopolies generally, integrated oil combines particularly, and all schemes for limiting oil production such as the then-current Thomas-Disney bill. In one of the classic pieces of literature of emerge from that embattled era, Fouts said the bill “was not true conservation. The true motive was the desire under this false front to preserve and protect the invested capital of the great corporate integrated companies from the leveling effect of the law of capture and of individual competition … To reduce many of the wells in TeXas to a low allowable set by the Commission is to endanger a great number of them and to cause waste in many more …We might much better term all of this movement conservation of invested capital and the preservation of monopoly rather than conservation of a natural resource and the prevention of waste … Don’t mistake what I am saying: this is a struggle of life and death. Monopoly, therefore, demands in the name of conservation, the destruction of the little independent oil man in order that the invested capital of corporate aristocracy placed on a false principle may be protected.” Employing the language of three generations of American liberals, Fouts then summarized anti-trust laws as a failure. “Within the past two or three generations, the laws of every state in the union governing the formation of that unnatural person, the corporation, have been constantly liberalized to invite and encourage all industrial life not only to take corporate form, but to take that form of corporate existence which is centralized in large monopolistic organization…Great holding companies have combined to control these giant trusts and corporate bodies so that, all unaware to us, we have again permitted to grow up in this nation an agency like the old law of our entire economic and industrial life has become highly centralized in the hands of a comparatively few great industrial groups,” Fouts continued. “The nation became thoroughly aroused to this danger some 40 or 50 years ago, the alarm culminating in the federal antitrust laws. Then, as is so frequently our error, having enacted the legislation designed to avert this evil, the American people promptly turned their attention to other matters. Unfortunately, the Supreme Court, in the judgment of many, completely emasculated the intent of these enactments, and not only emasculated them, but pointed the way to escape by its decision and interpretation of that statute which irresistibly drove industry not to decentralize, but to a great centralization.” ‘To This Cause . . . 1 Like liberal political theorists the country over, Fouts viewed the unabated growth of industrial concentration as an “evil power” that could only be halted by a larger government power. He called American monopolies “almost a government within a government,” and added, “to this cause more than any other, I think, may be safely attributed the evergrowing tendency to centralize government power in the national government and to break down the essential principle of states’ rights. ‘Among the industries which have led this great centralizing movement, the petroleum group has been in the fore-front. The very genius of the oil business has driven it to centralization and monopoly. Nearly a quarter-century ago, the Supreme Court, in an effort to destroy the almost complete monopoly then existing in the hands of the Standard Oil Company, brought about a dissolution of that company. Notwithstanding that dissolution, we find the Standard Oil Company of New Jersey today having an invested capital of nearly $2 billion … Control is effected through complete dominance of pipe line transportation facilities and the tremendous power to destroy competition. This limitless machinery of monopoly is in the hands of a very few men.” Delivering the independents’ argument that the price of oil was being artificially depressed by the majors to drive independents out of business \(the ‘majors countered that the flood of East Texas oil was solely responsible for the tegrated monopolies in principle before the House Committee. “Time and again witnesses appearing before you have disclosed it to be a fact that one integrated unit, such as the marketing end, the pipe line end, the refinery end, or the producing end, may be operated at a loss over a substantial period of time, that loss being absorbed by the profits realized from another unit. Hov\(r simple it is to eliminate, for instance, every little independent non-integrated refinery in the U.S. If the industry decided to operate that branch of the business at a loss for a sustained period of time, what earthly chance would a little man…have? The centralization of industry is driving the government to centralization. We cannot ‘have a democratic or republican form of government where the whole industrial life of the people to be governed has become centralized commercially in great corporated aristocracies. This is no more possible than it would have been possible to have had democratic or republican government under the feudal system with its great landed aristocracies.” “There cannot possibly be a continuation of this republic in its original farm without a breaking down of these giant centralized units,” Fouts said. What remedy did Fouts propose on behalf of his independent oilmen clients? His answer would startle his Freedom In Action followers of today: “That the great corporate aristocracies which have grown up in the petroleum industry should be bodily dismembered into their several natural units. The channels of commerce should be open only to such corporations whose business is limited to one of the four great units of the industry. It should never again be possible for a great oil combine to destroy its competition by losing money in the producing end while making it in the pipe line end … The pipe line business of this country should be combined under the control of the Interstate Commerce Commission … and I think this committee may frankly recognize that in truth there lies its problem and may pass beyond the oil industry and recommend to Congress that the federal anti-trust laws be completely revised and re-enacted to the end that they shall effectively not only impede but begin the process of breaking down these great destroying corporate aristocracies. This undoubtedly is the great ultimate purpose of President Roosevelt in the permanent legislation he contemplates. This is evident from numerous statements appearing in his book entitled ‘Looking Forward.’ ” Fouts then delivered his decisive point. “Nor would I have you stop hdre,” he said. “I think every agency of the government through means of taxation and every other legitimate barrier should be employed to burden and take away the unnatural incentive for building up these great corporate structures. Gentlemen, in not one single feature are they preservers of our liberty. A citizen does not have an inalienable right to set up these great destroying agencies. They are an unnatural and destroying evil which should be recognized and dealt with accordingly.” The majors’ case for proration had an economic and geological basis: Profligate production of oil in East Texas seriously weakened tl bottom hole pressureand thus endangered maximum recoverabilityof the entire field. Some sort of orderly development was an economic imperative, and if the particular methods used by Sterling favored major companies, the issue is not an open and shut case to all historians. As for the price of oil, many theories were spun by independentsFouts, himself, had one of the most sophisticatedto the effect that the policies of the majors more than overproduction caused the price to plummet to a nickel a barrel. Be that as it may, there can be little doubt that the avalanche of East Texas oil, hitting the country in a depression, was an important factor in the weakening of the market price. A Failure History records the independents’ efforts as a failure. The anti-trust laws were not “coinpletely revised and re-enacted” they remained almost wholly unchanged. Monthly proration coupled with daily allowables came to East Texas while producers in other American states faced no such encumbrances. The hundreds of independent refineries in East Texas dwindled away’ until in 1959, a small refinery owner from Tyler told a Senate tax committee he was the only independent left. Hundreds of producers, caught between low prices and forced low production, went broke if they were legalor ran “hot oil” if they were not. The tricks some of them played on Railroad Commission inspectors have become a part of our folklore: the underground line that siphoned oil in the dark of the night to waiting tank trucks which whisked it to independent refineries; the left-handed valve thatwhen turned off by an irate inspector actually turned on the flow of oil into the tanks. There are stories of inspectors coming unexpectedly among in dependents whose storage tanks were bulging with hot oil. Heated conversation flowed from one partner as the other ripped apart the railed steps up the side of the tank, rendering it uninspectable until enough time had passed for the oil to be siphoned off through pipes. The hot oil was sold, at below the market price, to independent refiners who cranked it through a hurried process and emerged with five cents a gallon gasoline, or four cents, or even three cents. Many a model T bobbed over East Texas roads on three cent gasoline during the height of the hot oil fracas. Sterling was denounced as a vicious corporate lackey who shaped state policy to fit his own Humble Oil Company \(which even then was substantially owned by Standard Oil Company of New Sterling became one of the feW Texas governors beaten for a second term, but the defeat came too late, many independents felt, to help them win in East Texas. The battle raged on surreptitious pipe lines, above and under the ground, criss-crossed the piney woods, carrying hot oil to pro Journal Notes `Sidling Away’ AUSTIN -The oil industry took public notice of what it called “the sidling away” of Texas indenpendent oil producers with publication in the August 28th issue of “Oil Daily” of an article outlining the alliance of Texas Independent Producers and Royalty Owners Association with Texas liberals and quoting TIPRO president Harry C. Jones’s statement there is “a new force on the political scene.” The petroleum industry’s national newspaper said that TIPRO “for some time has been sidling away from industry unity for unity’s sake, but a recently ended session of the Texas legislature seems to have stepped on the accelerator,” The newspaper noted that TIPRO president Jones claimed that association had, through its new independence, saved producers 12.2 million to $24.4 million a year in the tax fight and quoted his statement that independents “by asserting independence and remaining free to form alliances … will find themselves in a better position to see to it that their interests are not sacrificed unduly.’ ” Summarized Oil Daily: “Philosophical background for a change in the independents’ public relations policies was supplied by a Reporter piece headed ‘Grown Up Public Relations Is Basic Industry Need.’ In it, TIPRO said, ‘Straightfrom-the-shoulder advice given to TIPRO members at their 13th annual meeting by Dewitt C. Reddick, director of the department of journalism of the University of Texas, included the assertion that the public must be shown the oil industry as it iswithout false fronts, pretended unity, and claims of perfection … The cry for industry unity has become a symbol of the reluctance of Oil’s PR leadership to face up to the new demand … In. fact, most independents look upon it as a lastditch attempt to preserve the old order in which all segments followed the lead of the major in tegrated oil companies, often to their serious detriment.’ ” duce the money to pay the mortgage. When the independents read the majors’ theme of conservation and proration in the daily press, they shouted their outrage that the public was only getting the big business side of the story. A throwaway paper, existing entirely on Ads and militantly presenting the independent’s case and the latest “scandal tactic” of the majors, flourished in Gladewater. Its editor was Silas Adams. He was a no-holds-barred newspaperman and his free-swinging style produced some of the most readable provincial reporting the state has ever had. Adams met threats from Texas Rangers with 72 point headlines, was summoned three times before grand juries for criminal libel and never indicted, and became one of the most popularand hatedmen in oil country. His Gladewater Journal was published statewide in the 1932 gbuernatorial campaign he was not so much pro-Ferguson as he was anti-Sterlingas a counter to the daily press which was solidly for Sterling. With Adams in the van, Gladewater in particular and oil country in general led the wave of votes that beat Sterling for reelection. Victory for the Majors But ultimately, against a growing tide of inspectors and regulations, there was comparatively little room for such individualism, legal or otherwise. The number of surviving producers dropped from 2,000 to 800, then dropped again. The majors’ hold over refining became complete and with it came control of production through purchasing. The Railroad Commission as a production regulatory body became largely a myth with the majors determining how much production there should be by informing the commission each month how much oil they were prepared to buy. To this day, the commission sets its monthly allowable of producing days only after a public meeting with the refining companies. Some of the independents hung on and eventually got rich. Others lost their leases and spent, or are spending, the rest of their lives as lease hounds, promoters, or as roughnecks on drilling rigs, hoping for another strike and another boom. Before throwing in the towel, some tried so hard they went to jail for running hot oil. But there was no predetermined relationship between hot oil and getting rich; some got rich legally.