The global oil industry faced a classic squeeze in the spring of 1933: falling prices and expanding supply.
This brutal dynamic would exacerbate the international tension and economic havoc already roiling the world's markets during the Great Depression. And it would help set the stage for a century of energy politics.
The world's oil producers blamed the U.S.
"In all the oil fields outside America, restriction of output is being enforced," the Economist wrote. But in the U.S., "the twin evils of over-production and illegal production" were preventing efforts to maintain prices.
Several American states mandated reduced pumping, and some operators' associations agreed to scale back. Other independent producers ignored restrictions, and in states where these producers were politically powerful, governments refused to act. Some oilfield producers pumped more to sustain their revenue, but they only triggered price collapses.
In 1932, U.S. heavy crude oil averaged 87 cents per barrel (about $12 today), and light crude averaged 82 cents. By spring 1933, heavy crude had fallen to 44 cents and light crude to 66 cents. Then the bottom fell out.
Texas oil companies led the price decrease, with some resorting to "dime-a-barrel" deals. Four gallons of crude cost a penny.
The price decreases spread. "The wrecking of the midcontinent market was due to a deluge of cheap oil from East Texas," said J. Steve Anderson, an Oklahoma City oil operator.
The big corporations sought to force prices so low that independent companies with smaller reserves would incur heavy losses unless they shut down. By May, prices had increased to a quarter a barrel, still a losing proposition for smaller companies. Twenty-six companies in the Oklahoma City area refused to pump at that price. The market was a mess.
What was the government to do? Appeals to President Franklin D. Roosevelt urged federal production controls. Even the American Petroleum Institute's directors discussed government aid, a remarkable step for free marketers. But the directors were sharply divided on whether the crisis was temporary and would dissipate, or more serious and would demand regulation.
Oil politics in the Middle East were also in turmoil. Persia had abruptly cancelled the U.K.'s Anglo-Persian oil concession in November 1932. The shah wanted a higher share of profits to support his plans to build railways. Although U.K. leaders contemplated military intervention, a compromise was reached after Anglo-Persian's president threatened to abandon the negotiations.
More remarkable was the oil-concession agreement between Standard Oil Co. of California and Saudi Arabia's King Abdulaziz in May. Oil had been discovered in Bahrain in 1932, but no company had leaped at the king's offer of exploration rights. Finally, Standard Oil provided $250,000 up front and pledged a 10 cents-a-barrel royalty for any oil produced.
Given worldwide prices, it was no surprise that the company stalled on drilling for years. Ultimately, the deal would prove to be a brilliant one.
(Philip Scranton is a Board of Governors professor of the history of industry and technology at Rutgers University, Camden, and the editor-in-chief of Enterprise and Society. He writes "This Week in the Great Depression" for the Echoes blog. The opinions expressed are his own.)
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Philip Scranton at email@example.com