EGEE 120
Oil: International Evolution

The Lecture for The Prize Chapter 11: From Shortage to Surplus: the Age of Gasoline


The Prize Chapter 11: From Shortage to Surplus: the Age of Gasoline

Consider the following questions:

  • What was the role of the independents in the oil industry?
  • What are the differences in the public’s perception of gasoline between the 1920s and today?
  • How did the Rule of Capture impact the oil industry?
Black and white picture of trucks on a road
Military convoy as it appeared in western Nebraska during 1919 trek across the U. S. (from east to west) on the Lincoln Highway.
Credit: Lincoln highway nebraska, 1919 from Wikimedia Commons (Public Domain)

The Century of Travel: From Light to Transportation

The military wanted to demonstrate the potential of new motor transportation. They organized a cross country convoy that included Captain Dwight D. Eisenhower to dramatize the need for better highways. The trip started on July 7, 1919, traveling at less than six miles an hour the first three days and arriving two months later in San Francisco on September 6. However, if you have done it recently, you probably drove on highways or good roads and drove much faster than six miles per hour! The cross country caravan experience influenced Captain Eisenhower, who, when he became President Eisenhower, championed a vast system of interstate highways across the United States in the 1950s.

The demand for gasoline increased….. and increased….. and still continues to increase. In 1919, the US used 1.03 million barrels per day; ten years later, demand had increased 2.5 times to 2.58 million barrels per day. The demand of oil for new light had transferred to the demand for oil used for mobility. You can check the latest data on U.S. demand for oil and compare it with other countries. The increase in demand was driven primarily by the increase in the number of automobiles. In 1916, the US had 3.4 million registered vehicles, and by the end of the decade, the number had jumped to 23.1 million, with cars being driven farther and farther. As of 2008, there were nearly 250 million vehicles registered in the US according to the U.S. Department of Transportation. By 1929, nearly 80% of the world’s automobiles were in America, and oil’s share of total energy consumption had gone from 10 to 25% in the decade 1919 -1929, with gasoline and fuel oil accounting for 85% of the total oil consumption.

Graph showing national trends in population and automobile registrations from 1907 through 2000.
The graph shows national trends in population and automobile registrations in the United States from 1907 through 2000. Both have risen since 1907 but at different rates. Since approximately 1945, automobile registrations have outpaced population growth.
Click Here for Text Description of the Automobile registrations graph
The graph shows national trends in population and automobile registrations in the United States from 1907 through 2000. Both have risen at different rates. The population increased steadily from about 84 million people in 1905 to about 281 million in 2000. Automobile registrations increased from 0 in 1905 to about 20 million in 1920. The number of registrations stayed fairly steady until 1945 when it increased at a steady pace until around 1990 when it peaked at about 120 million registrations. From 1945 – 2000, the number of automobile registrations outpaced population growth.
Credit: Miller, John S.. "The Uncertainty of Forecasts." Public Roads 68, no. 2 (2004)

Gasoline Stations & Gasoline Marketing

A new culture emerged around gasoline. How many gas stations do you pass on your daily commute? Before 1920, most gasolines was sold by storekeepers who kept it dangerously in cans in the store. The Automobile Gasoline Company is credited with the first drive-in gas station in St. Louis in 1907. However, the proliferation of gas stations did not catch on until the 1920s. There were about 12,000 stations in 1921 and 143,000 in 1929. Note, however, that while there were fewer drive-in stations, there were about 100,000 stores that sold gasoline in 1920 compared to 300,000 in 1929. Interestingly, the drive-in stations were referred to the east of the Rockies as “filling stations” and west of the Rockies as “service stations.” The oil companies developed trademarks to distinguish themselves and promote competition. New pumping systems were developed and glass bowls on top of the pump assured customers of the purity of what they were buying by allowing them to see the quality of gas that was being pumped into their vehicle. The filling/service stations added features that would help their customers with their vehicles by checking/selling tires, batteries and accessories (TBA). The companies even hired the famous advertising personality, Bruce Barton, to develop highly effective advertisements to promote the “magic of gasoline” in the health, comfort, success, and mobility of the consumer.

Black and white picture of Senator Albert B. Fall
Senator Albert B. Fall.
Credit: Senator Albert B. Falls from Wikimedia Commons (Public Domain)

Big Bad Oil Again: Teapot Dome Scandal and Associated Kickbacks

Once gasoline became a central element in the lives and fortunes of Americans, gasoline prices became a point of tension and concern whenever the price went up. As we have seen from WWI, access to oil also became a critical component of national security, national politics, and strategies. The Taft and Wilson Administration had set aside three oil fields (Teapot Dome in Wyoming, and two others in California) to be “naval oil reserves” during the pre-WWI debates over the conversion of US Navy from coal to oil. Whoever was granted drilling access to these fields would have the government as an assured market. Senator Albert Fall of New Mexico, who had been appointed Secretary of Interior by President Warren Harding, managed to shift control of the naval reserves from the Navy to the Interior Department. He subsequently leased Teapot Dome to Harry Sinclair (Sinclair Oil) and one of the California reserves, Elk Hills, to Edward Doheny (Pan American). Some people felt the deals signed on April 1922 “smelt” and were very suspicious of the lease arrangements. In fact, according to the Prize, Walter Teagle of Standard Oil even sent a message through a third party to President Harding, stating that, “I’m not interested in Teapot Dome. It has no interest whatsoever for Standard Oil of NJ (SO of NJ), but I do feel that you should tell the President that it smells.” But his warning was not to be heeded.

Harding died shortly from “an embolism” and was succeeded by his VP, Calvin Coolidge. On January 24, 1924, Edward Doheny admitted that he had provided $100,000 to Senator Fall, but the Teapot Dome scandal dragged on for years until 1928 when it was discovered that Fall had received altogether $409,000 from Sinclair and Doheny with Sinclair having channeled funds through a fake company, Continental Trading Company, to Fall. As it turned out, the fake company, Continental Trading Company, was a means by which the oil men received kickbacks on oil purchases made by their own companies. Thus, Sinclair had passed on some of his kickbacks to Fall as a payoff. In 1931, Fall became the first Cabinet member to be sent to jail for an offense while in office. Sinclair was also sent to jail for six and half months for contempt of court and the senate, but Edward Doheny was found innocent and freed, leading one Senator to complain, “You can’t convict a million dollars in the United States.”

The Teapot Dome scandal and the kickback issues actually led also to the fall of Colonel Robert Stewart, the chairman of Standard Oil of Indiana, who admitted to receiving $760,000 in kickbacks, leading the major stockholder of the company, Rockefeller's only son, “Junior,” to oust him in a proxy fight.

The Teapot Dome left a bad image of the power and corruption of oil money for many years to come.

Painting of Henry Doherty
Henry Doherty, Oil Magnate
Credit: Henry L. Doherty, 1919 from Wikimedia Commons (Public Domain)

Rule of Capture, Unitization and Henry Doherty

Henry Doherty was one of the oilmen in the 1920s who owned a number of companies including Cities Service. He questioned the accepted norms in oil production. Having dropped out of school at a young age, he had a different view on life. He saw the current ideal of the “rule of capture,” which was based on the old English common law on migratory wild beasts and game, as a threat to his future and the future of the oil industry. The “rule of capture” fueled flush production which led to overproduction and wild price fluctuations. It needed to be eliminated.

Doherty argued that an oil field needed to be tapped as a single unit (“unitized”), instead of losing the gas and water pressure that lifted the oil to the surface, thus leaving unrecoverable oil in the field. If there were multiple owners over a specific field they could receive output apportioned to their ownership. This would maintain the underground pressure and ensure the largest recoverable amount. But the only way this could be monitored would be by government regulation. Many independents wanted their chance to get rich quick, without regulation, and strongly opposed the unitization views.

Doherty became very unpopular with the other oilmen. He kept arguing his point to anyone who would listen about the need to eliminate the rule of capture. He tried three times to present his proposals to the American Petroleum Institute (API) and was denied all three times. Smaller independent producers fiercely opposed his ideas and formed the Independent Petroleum Association of America and launched the campaign for tariffs to be placed on imported oil. The Independents did not achieve this goal either.

President Coolidge understood Doherty’s point about seeing oil conservation as a national security issue. After he won the election in 1924, he put the Teapot Scandal behind him and established the Federal Oil Conservation Board to investigate the conditions that Doherty kept arguing about. The Board concluded that, indeed, the industry was practicing wasteful production methods. Coolidge actually saw the wasteful production methods as a threat to US industrial, military, and national security interests.

With Doherty predicting in 1924 of a severe shortage of oil, and others such as J. Howard Pew of Sun Oil predicting greater production and excess, a decision was very hard to make.

Major Discoveries with Innovations and New Technology

New discoveries were few in the years 1917-1920, resulting in pessimism about production and increased prices. For example, Oklahoma crude that sold for $1.20 a barrel in 1916 was selling for $3.36 in 1920. In the 1920s, technology for finding oil improved as geophysicists led the way in developing tools for oil exploration. These innovative and scientific tools included:

  1. Torsion balance which provided subsurface structure information by measuring the point to point changes in gravity;
  2. Magnetometer that measures changes in the vertical magnetic field of the earth to give information on what lies beneath the surface;
  3. Seismographs based on refractive seismology to help identify underground salt domes that might contain oil. Also, seismographs based on reflection seismology allowed the shapes and depths of different kinds of underground structures to be identified. Suddenly, the industry had found new ways to “see” underneath the ground;
  4. Aerial surveillance provided a broad view of surface geology from above ground;
  5. Micropaleontology enabled the analysis of microscopic fossils dug from underground which provided information on the types and ages of sediments thousands of feet underground.

So, in spite of the shortage fear, the new innovations helped in the discovery of several major fields including the Signal Hill and others which made California the number one oil-producing state in 1923; the Greater Seminole field in Oklahoma in 1926 (flowed at 527,000 barrels per day (BPD) on July 30, 1927) and the Yates field in West Texas and New Mexico. Thus, with all the new discoveries, J. Howard Pew, not Henry Doherty, turned out to be right with respect to future oil supply. This removed the fear of running out of oil for now, but the old fashioned ideas of production still remained and needed to be addressed.

Map showing: SignalHill field, CA, Yates field, TX and Greater Seminole field, OK
Map of major US oil field discoveries in the late 1920s.

In addition to innovations in exploration and production, innovations in crude processing/refining such as cracking enabled more and superior gasoline with better anti knock properties to be extracted out of a barrel of crude, reducing the demand for more crude. With demand decreasing and the many producers each maximizing their production, the flush production led to oversupply and devastating consequences on the price of oil. With the glut and low prices, the opinion of the oil industry began to shift toward Doherty’s view to stabilize prices via his remedy of conservation and production control. Doherty now argued not based on shortage but as a means to prevent the flood and its catastrophic effect on pricing. Still, opposition to direct government regulation or involvement was extremely strong.

Restructuring and the Deep Depression

Rockefeller set the example of confronting imbalances in supply and demand through consolidation and integration within Standard Oil and the oil industry before the dissolution.

  • Consolidation – implies the acquisition of competitors and complementary companies.
  • Integration – implies the fusing of the upstream (exploration and production) and the downstream (refining, transportation, sales, and distribution) under one company working for the same goal.

The oil industry realized that the strategy of restructuring via consolidation and integration has its advantages and would form the foundation for our modern American oil industry. For example, Standard Oil of NJ bought half of Humble as early as 1919; Standard Oil of Indiana purchased Pan American; the Ohio Oil Company (later Marathon) expanded downstream; Phillips Petroleum Company expanded downstream into a major independent by the mid-1920s; Standard Oil of NY bought a major CA company and later merged with Vacuum Oil Company to form Socony-Vacuum and built the brand name Mobil. There were many other mergers that came close to happening. There were now many big companies and several independents by the 1920s, as by 1927 45% of the refined products were controlled by the various “Standard companies” compared to the 80% two decades earlier.

The stock market plunged in October 1929 ushering in the Great Depression that led to many people losing their jobs, savings, and standard of living. There was massive unemployment, poverty, and hardship throughout the nation, ending the constant growth in demand for oil. Just when the country was realizing in autumn 1930 that the stock market crash was not a simple correction but a true economic disaster, as luck would have it, the largest oil field in the lower 48 states, the Black Giant in East Texas, was discovered. Now, there would be a flood of available petroleum with a consequent drop in prices.

Yergin, Daniel. (2008). The Prize: The Epic Quest for Oil, Money, & Power. New York: Free Press.

Crowds lining Wall street after the stock market crash, with cars in the middle
Crowd gathering on Wall Street after the stock market crash of October 1929.