Page 3


At the same time that the big oil companies are losing their out of the ground as they could in order to profit before the negotiating strength, rising demand from China, India, and market became even more saturated with oil. other developing countries is allowing the national oil corn Neighbors with wells tapping into the same field would panies to change their focus. Instead of looking first to export overproduce oil from their well to assure that “their” oil their products to Western consumers, they are looking east. wasn’t pumped out by adjacent landowners. The chaos in the American oil business reached its acme in the early 1930s, ong before the rise of OPEC, and years before Saudi shortly after prospectors discovered the giant East Texas oil Arabia became the key player in the global oil busifield. After several years of legal wrangling at the state and fed ness, the world’s most important oil cartel was based eral level, the Railroad Commission was empowered to impose in downtown Austin, Texas. production limits and “unitize” fields thereby apportioning the Between the 1930s and the early 1970s, the three members underground oil rights to the owners of the land above. of the Texas Railroad Commission were the most important But Texas’ dominance of the industry went far beyond people in the global oil business. They met once per month legal issues and oil prices. That oil was a strategic weapon to set “allowables”the volume of oil that each operator in during times of war and crisis. Texas oil provided a critical the state was allowed to produce advantage in World War II. The Big from his wells that month. The Inch and Little Big Inch pipelines, allowables were set to meet cur PERCENTAGE OF OVERSEAS both of which were built in record rent oil demand and not a barrel OIL PRODUCTION PUMPED BY time during the war, provided huge more. The Texas cartel operated AMERICAN-BASED COMPANIES quantities of fuel to the East Coast in a straightforward manner. The and became key elements of the three commissioners looked at oil American war effort. \(That said, inventories. If they were rising, it’s worth noting that America’s they cut production. If inventories domestic oil production couldn’t were falling, they allowed pro keep pace with demand during the duction to rise. And because the -\\5′<------ 4 5 70 war. In both 1944 and 1945, at the Railroad Commission controlled -____ height of World War II, the U.S. was the flow. of oil from the world's "\(1958 a net crude importer. The war years most prolific fieldsthe ones in are notable for another fact: the Texasthe system worked. No ':--'-----10-": last time the U.S. was a net crude other entity was able to control the supply of oil with the discipline and A surfeit of Texas oil prevented effectiveness of the commission. the Arab oil producers from using And by controlling the prices in the threat of an oil embargo to pres the burgeoning American market, the Texas cartel effectively sure European countries and the U.S. during the Suez Crisis determined world prices, too. in 1956 and the Six Day War in 1967. By the late 1940s and 1950s, increasing amounts of oil were But America's dominance of the global oil business couldn't being discovered in Texas, Venezuela, the Persian Gulf and last forever. And the end of its dominance can be traced to a elsewhere. And those discoveries led to an enormous oversupspecific date: March 16, 1972. At the meeting on that day, the ply of oil production capacity. So the Railroad Commission three members of the Texas Railroad Commission met and simply cut the allowable for Texas producers, thereby balancdeclared "a 100 percent allowable for next month." In other ing supply with demand. Even in a potentially glutted market, words, the state's oil producers could run their wells at full prices didn't fall. In fact, they rose, giving every producer capacity. Without explicitly saying so, the commissioners had even bigger profits. As one economist explained it, the sysadmitted that Texas' oil wells had reached the limits of their tern allowed the big American oil companies to "fix their productive capacity. The U.S. oil business, which, for four own prices and make them stick." Another study, done in decades, had near-total dominance of the world market, no 1949 by the U.S. Senate's Small Business Committee, said the longer had the ability to supply extra oil to the market, and Railroad Commission's system formed "a perfect pattern of therefore drive prices down. Without that ability to produce monopolistic control over oil production and the distribution more oil than the market needed, the Railroad Commission's thereof...and ultimately the price paid by the public." power as a cartel was lost. The Railroad Commission may have been a cartel and it Although few people recognized it at the time, the commis may have had monopolistic control, but it also brought stasioners' move was an inevitable result of the peak in America's bility to a chaotic market. Without the cartel, oil producers overall oil production. In 1970, two years before the Railroad were constantly being whipsawed by prices, going back and Commission's announcement, U.S. oil production hit its allforth between boom and bust, between underproduction and time high of 9.6 million barrels of oil per day. And ever since the absence of the cartel, producers rushed to get as much oil In 2005, U.S. oil production averaged just 5.1 million barrels 14 THE TEXAS OBSERVER MAY 2, 2008