FDR’s New Deal with Energy: Part I (oil exploration & production)

By Robert Bradley Jr. -- January 8, 2019

“What was FDR’s New Deal (1933–35) pertaining to energy? The real New Deal was centered on petroleum and coal. Second, it was an alliance of special business interests and power-hungry bureaucrats working against common consumers and taxpayers. Third, it was about a police state to try to enforce command-and-control edicts.”

What exactly is the ‘Green New Deal’? E&E News (November 16, 2018) described the Progressivist energy policy of forced energy decarbonization.

“In a Democratic clash on Capitol Hill, progressives are pushing an ambitious plan to wean the U.S. off fossil fuels, boost renewables and build a ‘smart’ grid,” states Hannah Northey. “The proposal, drawing inspiration from President Franklin Roosevelt’s Depression-era New Deal, is one that progressives — led by Rep.-elect Alexandria Ocasio-Cortez (D-N.Y.), a rising star on the left — want Democratic leaders to embrace.”

Northey describes the “work in progress” (pursuant to Cortez’s campaign website) as follows:

100 percent renewables

The plan calls for the United States to shift to all renewable energy within a decade. Such a move has been at the heart of ongoing debates within the energy sector for years. Experts have clashed on whether such a move is possible and on the definition of “100 percent renewables” ….

Build a ‘smart’ grid

The plan also calls for the creation of a national, energy-efficient “smart” grid. Billions of dollars around the world has been invested in clean energy technologies, and grid experts for decades have been innovating ways to link them together, from solar arrays and wind turbines to electric cars.

Upgrade homes and businesses

Boosting efficiency is also on the menu. The plan calls for “upgrading every residential and industrial building for state-of-the-art energy efficiency, comfort and safety.” That push could directly confront the Trump administration’s decision to leave energy efficiency on the back burner….

Decarbonize, decarbonize, decarbonize

Progressives are also calling for deep decarbonization across the nation. The plan includes language that would reduce emissions from manufacturing, agricultural and other industries, as well as decarbonizing, repairing and improving transportation and other infrastructure. The plan would also call for “funding massive investment” in the drawdown and capture of greenhouse gases, but the proposal hasn’t outlined the specifics of how to do that.

Jobs, jobs, jobs

In addition to boosting clean energy and exports, the plan would also lay out a national jobs program. Specifically, the plan calls for “training and education to be a full and equal participant in the transition, including through a national “job guarantee program” to “assure every person who wants one, a living wage job.”

The something-for-everyone–at the expense of consumers and taxpayers–can be harshly criticized in its specifics. It is at least a decade-long program, its advocates admit. It begins with energy but quickly gets to the amorphous concepts of social justice and equality. There is talk about detailed central economic planning and a planning board. Economist Robert Murphy, an authority on both current energy policy and the America’s Great Depression, has criticized the outlines of the Green New Deal with more to come. 

But what was FDR’s New Deal (1933–35) pertaining to energy? The real New Deal centered on petroleum and coal. (Natural gas, produced as a byproduct of crude oil, was secondary to manufactured gas from coal.) Second, the New Deal was an alliance of special business interests and power-hungry bureaucrats working against common consumers and taxpayers. Third, it was about a police state to try to enforce command-and-control edicts.

The description below is adapted from my 1996 treatise, Oil, Gas, and Government: The US Experience. (For more detail and documentation, see pp. 99–103.)

Controlling Production

The drive to coordinate oil production cutbacks in the name of mineral-resource conservation had come from the states. The federal effort under Herbert Hoover, who took a “states rights” position, was tantamount to inaction. But with the defeat of Hoover in November 1932 and new presidency of Franklin D. Roosevelt in March 1933, a New Deal for oil would emerge.

Recognizing the increased likelihood for government action at the national level, industry officials and the American Petroleum Institute (API) actively entered federal politics. In March 1933, a “Committee of Fifteen” was formed by Harold L. Ickes, the newly appointed Secretary of the Interior, to hammer out an industry ­supported oil and gas conservation program.

Representing the majors’ viewpoint, large‑scale production cutbacks were recommended.  As a consequence, a counter‑group, the Independent Petroleum Association Opposed to Monopoly, was formed to represent East Texas and California producers enjoying flush produc­tion, as well as small refineries desir­ing cheap feedstock.  Their program, in contrast, men­tioned nothing about production cutbacks and recommended stricter import re­strictions and antitrust action against the majors.

The majors were the stronger of the two groups, and the Committee’s “big oil” program emerged in Congress as the Marland‑Capper bill, giving broad authority to Washington to control both production and price.  This bill, however, was in competition with Sen. Robert Wagner’s (D-N.Y.) popular National Industrial Recovery Act (NRA), a federal public-works program promising federal support for all industries to recover from the depression.

The Marland‑Capper bill, consequently, became amendment 9(c) in the NRA.  In the amending process, Sen. Tom Connally (D‑Tex.) added an important provision granting enforcement power to the Interior Department to combat “hot oil” transpor­tation, a measure designed to plug the main leak in the proration dike.  The NRA, including the so‑called “Connally Amendment,” became law on June 16, 1933.

The following month, President Roosevelt invoked Section 9(c) of the NRA by executive order and gave Interior Secretary Ickes jurisdiction to combat the hot‑oil problem [oil production in excess of government-set quotas]. Establishing a Division of Inves­tigation, Ickes sent federal agents straight to the source of the problem, East Texas, and achieved immediate results by curtailing hot‑oil production, refining, and distribution by approximately one‑third.  This successful begin­ning, however, would soon incur problems requiring new federal strat­egies.

With the federal government attuned to East Texas, the American Petroleum Institute convened a meeting in Chicago to compose an industry code under the NRA in the summer of 1933. While many industry parties favored restricted production to increase revenue, price-fixing to achieve the same result was hotly debated.

The “Chicago Code” revolved around price legislation and other less crucial issues. Against price floors were majors whose marketing operations helped them to weather wellhead storms. They also questioned whether price‑fixing could work if overproduction continued and were concerned that favorable price regulation could turn into unfavorable price regulation.

Non‑integrated refiners also opposed higher prices from price minimums. Favoring price-setting, on the other hand, were independents, led by Wirt Franklin and the two-year old Independent Petroleum Association of America. Warren Platt, editor of the National Petroleum News, closely aligned with downstream independents, argued that price-fixing was a false substitute to restricted production and warned of socialized production in all but name should licensing and other measures follow.

In addition to industry factionalism, a bureau­cratic rivalry developed between Interior Secretary Harold Ickes who favored price-fixing and National Recovery Administrator Hugh Johnson who did not. The stalemate was broken by FDR who on August 19 compromised by allowing discretionary price-fixing on a 90-day basis. Ickes was also appointed Code Administrator with autonomy from Johnson and the other NRA codes. An industry advisory board, the Planning and Coordination Committee (PCC), chaired by Wirt Franklin, was also created to assist Ickes.

Code of Fair Competition for the Petroleum Industry (Oil Code)

On September 2, 1933, the Code of Fair Competition for the Petroleum Industry (Oil Code) became effective.  The tone of the new code was stated by Petroleum Administrator Harold Ickes. “Our task,” Ickes told the Planning and Coordination Committee, “is to stabilize the oil industry upon a profitable basis.”

Article I, setting price floors, was not activated. Article II set wage and hour regulations for drilling and production firms. Article III, Production, limited withdrawals from storage to 100,000 barrels per day and gave discre­tionary authority to the PCC for other restrictions.  Output was regulated to demand, which was to be determined “at intervals” by authorities and allocated by state.

Price-fixing was detailed in case of activation:  average retail gasoline prices were to be multiplied by 18.5 to set a wellhead price per barrel, below which “it shall be an unfair practice . . . to buy, sell, receive in exchange, or otherwise acquire.”

Coordinator Ickes established the Petroleum Administra­tion Board (PAB) for administering the code, which “in functions and in struc­ture . . . greatly resembled the old Oil Division of the United States Fuel Adminis­tration in World War I.” The PCC established a network of local-level commit­tees staffed by oil execu­tives to apportion quotas to each producing state (14 states did not have proration authority) and deal with code violations.

Improved price conditions delayed Ickes’ expected price order until mid‑October when he announced that effective December 1, the published price floors would be activated. Major companies immediately protested, and in­dependent producers began to have second thoughts.  With a promise by majors to dedicate $10 million to a gasoline purchase pool to stabilize prices, Ickes changed his mind.

Although price‑fixing remained in the Code, it would never see the light of day.  Ickes instructed his assistant solicitor and right-hand man, J. Howard Marshall, II, to prepare an order fixing minimum prices for every grade of crude oil and petroleum product for all points in the United States. With the help of fellow assistant solicitor Norman Myers and economist J. Elmer Thomas, they spent weeks on the project before telling Ickes “they could not draft an order that could work and no one else could either.” Ickes reluctantly agreed.  Volumetric regulation was the key.

Industry Cronyism

The PAB reflected the wishes of the majority of the industry it was intended to serve.  Federal coordination was provided in place of federal control.  Production-quota decisions were left to state conservation agencies;  the main function of the PAB in the production phase was assisting the Bureau of Mines’ Petroleum Economics Division with its monthly oil-demand forecast.

In September 1933, the PAB issued its first national demand forecast (“rec­om­mendation”) to apportion supply among producing states.  By the end of the month, the recommendations resulted in a 10 percent drop in national production and a 40 percent drop in East Texas. Crude prices increased from $0.64 to $1.00 per barrel in September alone and remained relatively high for the rest of the Oil Code period.  This reversed the profit picture for many oil interests that had been political­ly active in establishing the regulations initially.

By no means did the Code produce its full intended effect.  PAB quota recommendations increasingly became the starting point from which state conser­vation agencies increased allowables according to local industry desires.  Under pressure from local constituents, the Texas Railroad Commission in late 1933 began to exceed recommended quotas by over l0 percent. Oklahoma and California also consis­tently produced in excess of allocations as Table 3.1 indicates (see pp. 104–105).

In addition to state allowable assignments in excess of federal recommenda­tions, excess oil came from other sources.

Wildcat production was not recorded in the state’s figures of oil output.  Exports went unreported or were grossly underestimated. Above all, hot-oil was the main problem as over-producing well operators found ingenious ways to escape detection.  To avoid a total breakdown of proration, federal author­ities redoubled their enforcement efforts in East Texas in 1934.  After several years of practical difficulties and legal setbacks, described in chapter 12, control of the great field was finally achieved for good in 1936.

The courts ended the several-year experiment with economic petroleum planning and then invalidated the National Recovery Act itself.  On January 7, 1935, the Supreme Court invalidated Section 9(c) of the Oil Code on a technicality; the section had been inadvertently deleted in a formally adopted prior draft.

Aftermath

With hot‑oil trans­portation no longer prohibited, the end of mandatory wellhead proration seemed near. A legislative substitute was quickly provided by Texas Senator Tom Connally, however, that took effect on February 22. A potentially ruinous “regulatory gap” was closed.

On May 27, 1935, the Supreme Court declared the entire National Recovery Act unconstitu­tional. With the book closed, a total of 627 administra­tive orders had been given under the Oil Code, several hundred of which certified legal “allowables” and approved allocations among the states.

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Part II tomorrow will examine FDR’s New Deal/Code of Fair Competition in the oil refining sector. Part III on Thursday will describe the Oil Code regulating gasoline service stations.