World’s First Oil Cartel – Deep in the Heart of Texas
One hundred and eleven years ago – on January 10, 1901 – an oil gusher rang in a new era in energy leadership. This was the day when a plume of oil surged almost 100 feet into the air at Lucas No. 1, at Spindletop near Beaumont, Texas. This well continued to spew oil for nine days before it could be capped, giving Texans a glimpse of the power and scale of the impact that energy would have on the state’s future. Over the coming decades, the Lone Star State would establish itself as a global energy leader, becoming the home of the world’s first oil cartel and many of the world’s largest energy companies.
Today, when society speaks of oil cartels, one generally expects to hear about activities in the Middle East, Venezuela, or parts of Africa.
But, the world’s first oil cartel did not hail from Caracas or Baghdad. Instead, it developed its roots in the United States.
On April 3, 1891 the Railroad Commission of Texas (now the Texas Railroad Commission) was established by the state Legislature under Governor James Stephen (“Big Jim”) Hogg. Initially, the Railroad Commission was given jurisdiction over rates and operations of railroads, terminals, wharves and express companies. But, in less than a decade it began enforcing regulations aimed at the new oil and gas industry that was developing in the state.
When the Railroad Commission was established, it was just one example of state and local level regulation of the railroad industry. Throughout the United States at the time, governments were mobilizing to regulate the power of one of the country’s first big national industries – the railroad. This transportation system had revolutionized the nation’s marketplace, creating a link between east and west, rural and urban markets.
In Texas, the state’s railroad system expanded to link rural Texas cattle ranchers to the state’s markets. As a result, towns appeared along the rail lines seemingly overnight and many communities far from the rails quickly relocated to take advantage of the advantages offered through being connected. Later, the railroad would be the impetus for creating the Texas Railroad Commission, in order to regulate the fair use of this service. The Commission’s jurisdiction would later grow to oversee oil and gas operations in the state, becoming the world’s first oil cartel.
This role development actually began before Spindletop blew in 1901. Two years earlier the Texas Legislature had declared that all gas wells in the state had to be shut-in (plugged) within ten days of completion until a time when the gas could be sold. The Railroad Commission was tasked with making sure that gas-drilling operations complied with this new rule. This seemingly small role would soon lead to expansive Commission control over the price of oil and gas in the marketplace.
In 1919, the Texas state Legislature enacted a statute that required the conservation of oil and gas and forbid wasting these resources. The Texas Railroad Commission was assigned jurisdiction to enforce the new statute and it soon published rules regulating the industry. Texas quickly became the first state to adopt a well spacing rule to reduce fire hazards.
By the summer of 1920, the Railroad Commission had also been given the ability to regulate the production and sale of natural gas. This would quickly be expanded to an ability to regulate oil production. By 1930, the Commission had issued its first statewide proration order – limiting oil production in the state to 750,000 barrels per day, beginning their reign as the world’s first oil cartel as they artificially reduced demand to maintain higher market prices for oil.
In 1930, the famous East Texas Oil Field was discovered. Covering 140,000 acres over five Texas counties, this field would become the largest oil field in the continental United States. After its discovery, production from this field was quickly regulated by the Railroad Commission to prevent another dip in the market price for oil. Martial law was used to ensure compliance with conservation regulation and production limits in the face of this massive oil discovery and to bring stability to the industry.
This control over production would set into motion a flurry of activity through the Texas Legislature, with dozens of amendments and pieces of new legislation passing through the Texas Capitol over the next several decades. The Railroad Commission’s right to regulate oil and gas production in the state would be challenged, and upheld, in the Texas and U.S. Supreme Courts. And, by 1934, the Railroad Commission’s jurisdiction would expand to include refined petroleum products and by-products.
With this added power to control the state’s petroleum industry, the Railroad Commission soon transitioned into its role as the world’s first modern oil cartel. From the 1940s through the 1960s, the Texas Railroad Commission not only regulated Texas oil and gas production, but also coordinated with other high-production states through the Interstate Oil Compact Commission (IOCC) to ensure that oil prices stayed high. At the same time, the Commission supported restrictions on foreign oil resources to prevent an influx of cheap oil into the U.S. market, similarly to what one sees today with tariffs on imported biofuels.
In this role, the Texas Railroad Commission became the world’s first oil cartel, effectively controlling all U.S. domestic oil transactions. Until the formation of the Organization of the Petroleum Exporting Countries in 1972, the Commission was able to effectively set the market price of oil, making their Commissioners some of the most powerful government officials in the world.
Today, the Texas Railroad Commission continues to oversee portions of the oil and gas industry in the state. And, as the state’s energy industry continues to evolve, so are the Commission’s responsibilities. In addition to implementing rules to further conserve the state’s natural resources (for example, by requiring frequent natural gas pipeline inspections to reduce leaks), the Commission has also recently been given jurisdiction over the extraction of anthropogenic carbon dioxide and is likely to oversee any carbon capture and storage activities…
- Photo of oil derrick in east Texas by roy.luck and used under this Creative Commons License.
- Map of OPEC member countries by Bougeois and used under this Creative Commons License.
- Photo of railroad tracks in Texas by Wesley Fryer and used under this Creative Commons License.