Texas Banks Its Oil
I
IN the early days of the Breckenridge oil field in Central Texas, where, before oil, grass for cattle meant wealth, John Warren, an oilman, stood behind a farmer he knew in a line before a bank teller’s window.
‘How are the oil companies treating you?’ Mr. Warren asked.
‘Not a damn bit good,’ snorted the farmer, fingering a check stuck in the front pocket of his dirty blue overalls. He pulled out the check. It was for $37,500 — royalties for fifteen days.
‘Seems to me they treat you pretty good,’ said Mr. Warren.
‘Oh, the check’s all right,’ said the farmer, ‘ but them damn-fool oilmen went and ruined all my grass.’
To-day the oil business in Texas has been tamed. Oil fields dot 100 out of the state’s 254 counties, yet this giant industry has come to the same turn in the road which another Texas titan, the cattle business, took several decades ago when millions of acres of ranges were fenced and the cattle business changed from a careless, wasteful living off the land to a canny, ordered proceeding. The turn in economy for the oil industry points down the broad, sensible path of proration. Texas is banking its oil.
Supervision by strict law has curbed the old-time boom when a new field is found. The quiet business men, backbone of the industry for thirty-five years, have prevailed over the colorful, though not forgotten, pioneer characters who brought in the gushers of the fabulous days of Spindletop, Sour Lake, and other great discovery fields.
A comparatively small number of the pioneers made great fortunes out of their strikes. Many sank their first, lush profits back into the ground in dry holes. Some great fortunes which were piled up in the days of the unrestricted gushers have been guarded well and even increased by wise investment over the past thirty-five years. But more fortunes have been thrown away in oil than ever have been secured. Apart from the great good that the industry has done in paying salaries to tens of thousands of persons, and the correlated benefits derived from any great industry, more cash has been put into the oil business than has ever been taken out. But where hundreds of large fortunes have been lost, thousands of small farmers and landowners have been settled on Easy Street through royalties.
Small towns have burgeoned into great cities through infusions of oil money; clean, modern small cities have been built where before was bald prairie land. Texas has a fine system of state highways. Modern brick schools with lighted athletic fields, satin-costumed ‘pep’ squads and drum-and-bugle corps, with a regular city-school education thrown in, are offered to the youth of most of its towns. The majority of these benefits have come from payment of heavy taxes by the industry.
At a time when oil was still a rarity, a sticky fluid good only for coal-oil lamps, the Texas legislature, at a meeting in 1876, set aside one million acres of land for the University of Texas. The first grant specified that the land should be carved from East Texas. But this was rich farm land, and the move was stopped. When the grant officially was made in 1885, a small empire carved out of the heart of Central and West Texas lands was conveyed to the University. It may have been that the legislature felt a twinge of conscience for having let the grant be shunted away from East Texas; it may have been that the horizons in the central part of the state seemed limitless. At all events the legislature raised the grant from one million to two million acres and chose it from the best free land available at that time. Taking Midland as a centre, a fan spreading seventy-five miles over Crockett, Reagan, Pecos, Crane, Ector, Winkler, Ward, and Andrews counties covers the University holdings. The grazing rights in this semi-arid but valuable ranch land to-day yield $250,000 a year, but in oil the University has a nest egg of some $28,000,000.
Only the interest on the funds derived from oil royalties and oil bonuses may be used by the University. The principal, by state law, is safely removed from any possible political raids. The University maintains its own geological and research offices at Midland, and its affairs are managed by a board of regents of nine, headed by J. R. Parten, Houston oilman.
Any revenue from sale of lands or sale of oil from University lands must go into the general fund. While this puts the University somewhat in the position of being a rich ward of the state with a comparatively small spending allowance, it safeguards the institution’s heritage. The principal of the University funds, under state law, may be invested only in United States bonds or Texas municipal or county bonds. The potential value of the two million acres has been estimated at $50,000,000. The interest of the University’s oil fortune runs about $900,000 a year, which, with the quarter million from the grazing leases, makes a tidy $1,150,000 yearly income.
This income has largely been used to build a fine physical plant to replace the decrepit frame buildings which were eyesores on the campus for many years. When the building program is completed, it is the plan of the board of regents to establish scholarships and to use the income for advancing the scholastic standing of the University.
II
A recent estimate of the reserves of oil in the ground in the United States was 14,015,092,297 barrels, of which Texas is credited with having over 7,234,124,421 barrels, or some 53 per cent. The total production of crude oil in 1938 for the world was 1,983,090,000 barrels, of which the United States produced 1,200,883,000, Texas alone, under proration, yielding 470,760,325. This gives the state better than 23| per cent of the world’s oil production and more than 39 per cent of the production in the United States. In one day, with its wells flowing to capacity, it could produce enough oil to last the United States for several years.
There are to-day more than 500 oil fields in Texas. It is impossible to give an arbitrary figure because new fields are being discovered continually. There are 84,000 oil wells on these fields; a new producing well is brought in somewhere in the state every fifty minutes.
The East Texas field, the greatest proved oil area in the history of the world, has 27,000 wells rising like a forest over 130,000 acres. These wells, if turned wide open, could produce 15,000,000,000 barrels of oil in one hour — enough to supply the entire petroleum needs of the United States for more than a week. A 24-hour production from this field would supply the nation for 240 days.
The Gulf Coast, from the eastern tip near Orange to Brownsville, is spotted with oil fields, with varying allowables. Houston is ringed with them. The major Conroe field is forty miles to the northeast, and a score of comparatively small but rich ones are close by. Corpus Christi is the boom centre of an area spotted with fields developing so fast that any estimates are quickly outdated.
The Wichita Falls territory found new life in the KMA field. The Breckenridge field, like some of those around San Antonio such as Luling and Darst Creek, is an old standby which plays a heavy part in the daily production of the state. Yates Field, in West Texas, is rated as one of the major fields in the state, with a potential of 8,000,000 barrels a day. Here also production is cheap, as the wells are shallow. One recent test on a well showed that it has an estimated potential of 100,000 per day — the same as when it was brought in several years ago.
III
Oil, on a commercial scale, is about fifty years old in Texas. In 1885 there was some shallow production in Nacogdoches; two years later, during drilling for water in Corsicana, oil in paying quantities was found. J. S. Cullinan, a Pennsylvania oilman, came to Corsicana, looked over the prospects, then returned East to find capitalists to back his development of the field. He built a refinery in Corsicana and marketed the products — mostly kerosene and fuel oil.
The first big strike for Texas came in January 1901. Captain A. F. Lucas, an Austrian engineer, brought in the first well at Spindletop, just outside of Beaumont. The well blew out and ran wild for several days, roaring skyward with an estimated 70,000 barrels a day. The black crude plastered the countryside, drenched the wildly excited drillers and spectators, ran off into gullies and ditches. Then the oil caught fire and the area was a mass of flame and smoke for days until the overflow burned out and the well was brought under control.
The news spread over the nation that Spindletop was a forest of gushers — easy money. A swarm of people from all over the country descended on Beaumont, with its streets of unfathomable mud and its plague of mosquitoes. Oil companies blossomed and showered stock on the unsuspecting heads of the greenhorns and suckers who thought the wells would flow forever. There was a sad awakening a few months later after oil had been refused at three cents a barrel. The natural pressure of the wells was expended when the lavish flow stopped. Most stockholders of the hundred odd companies formed in the frenzy of the first rush at Spindletop never got the return of a dollar on their investments. Only three or four of these companies have survived.
But the bursting of Spindletop’s first bubble only served to clear away the chaff of the drifters and left the field clear for the real oilmen. Fightin’ Joe Cullinan, as he was known to the roustabouts and roughnecks in the field, came down from Corsicana. T. J. Donoghue, another oilman from the grandfather of all oil states, Pennsylvania, joined with Mr. Cullinan, and the Texas Company was formed. Walter B. Sharp drilled nothing but a dry hole at Spindletop, a field of gushers, yet went on to Sour Lake later and found production which laid a foundation for a substantial fortune. Howard Hughes, father of the roundthe-world flier and brother of Rupert Hughes, the novelist, was one of the outstanding figures of those days. Hughes invented the rotary drilling bit, which speeded up the entire oil industry and made millions for him. William S. Farish, now chairman of the board of the Standard Oil of New Jersey, was a young lawyer from Mississippi who got a start in the oil business at Spindletop.
The development of the automobile brought a steady and ever-increasing demand for petroleum. At last oil was good for something besides lighting the lamps of the nation.
Wildcatters, spurred on by this new demand, drove their drilling bits into the swamps of the Gulf Coast and the soft loam of plantation land, split the hardbaked prairie under the blasting Texas sun, and drove the bits to pay sand through howling northers in the Panhandle. Sour Lake, Humble, Blue Ridge, and others were brought in down in South Texas. To the north, Tom Waggoner was the driving force bringing in another ocean of oil. Waggoner, a wealthy cattleman, made many millions in oil, but he would not let gas be piped to his fireplace — he wanted a place to spit. The late T. P. Lee, once a driller drawing a daily wage at Spindletop, was rated as a rich man in Houston, a city where ordinary millionaires are regarded as plain ‘home folks.’
Following the early discovery fields, there was a steady succession of oil strikes which daubed almost every section of the state with oil. The Breckenridge field was discovered in North Texas in 1916. The Ranger field, just to the south of Breckenridge, proved a rich one. Then came the Borger field, famed because it was one of the toughest of all oil-boom towns, a boom town that defied all law and order until in 1927 the Governor sent in the National Guard.
These fields boomed before proration. Some of the farmers and landowners were almost smothered with royalties; and some of them didn’t know what to do with their money.
Away over in a field near the unpainted house, about a quarter of a mile from where the men were dancing around the new oil well, the tall farmer, leatherbrown, went steadily ahead with his ploughing. He was still striding along in the fresh black furrow behind the plough when one of the drillers and two reporters from the Houston papers caught up with him to tell him oil had been brought in on his land.
‘What’s the first thing you plan to do with all this money you’ll be getting?’ one of the reporters asked.
The farmer hesitated a moment. He looked across the field to the house, where a thin blue wisp of smoke rose in the hot Texas air.
‘Well, right off I don’t know,’ the farmer answered. ‘Ma’s been needing a cookstove mighty bad.’
Hundreds of other small farmers and ranchers reacted in the same way. The thousands of dollars in oil royalties pouring in were unreal to them — but their land was real, something to trust in, a sure living if properly cared for. One of the largest gushers in the history of Texas came in on a small truck farm near Orange in 1922. The old farmer carefully kept the drillers away from his truck patch and, while the great well was swamping him with cash, daily loaded up his wagon with vegetables and sold them from door to door in Orange.
A county editor who had been plugging away on a large Houston newspaper for some sixteen years bought six acres of land in South Houston, a suburb of small homes. Carefully, pridefully, he set out several fine pecan trees which soon took root and blossomed in the rich soil. But the soil was richer than the county editor thought. The South Houston oil field was brought in; and shortly three oil wells were flowing on his six acres. That was several years ago, and the income from his little property probably is sufficient to support him for the rest of his life in a style to which he was not accustomed before his strike. But he sits at his desk, handling news items from his county correspondents and writing stories for the paper. ‘Oil wells have gone dry,’ he says. ‘I’ve got a job here.’
This same county editor is a product of East Texas, and while negotiations with a large oil company were going on for his land he showed typical East Texas shrewdness in trading. Some say it is not shrewdness—just plain old East Texas slowness. The agent for the oil company made the editor an offer, the same per acre that he had made to other residents in the South Houston field. The editor said he would think it over. This took several days. In the meantime the lease man thought it looked like a holdout. He came back with a higher offer. The editor had to begin all over and think out the new proposition. This seesaw went on for several weeks, with the oil company constantly increasing the ante. Finally the company gave him time to make up his mind and he accepted the offer — far higher than any his neighbors received.
In general, East Texas folk continually amazed the oilmen, who were used to the wild antics of the new-rich in other fields. After a preliminary, but short-lived, spree of buying clothes for the family and perhaps a new Ford, the average East Texas farmer salted his lease money and royalties away in the bank just as he salted away his hams and bacon in the smokehouse.
Millions of dollars in cash swamped the small East Texas banks, which, glutted with this money, were at first at a loss to invest it. Much of the cash was sent to banks in Dallas and other large cities. East Texas bankers had been timid about lending the money out to oil operators for further oil development. However, the big city banks soon found that legitimate oil operators furnished a good outlet, that they were good risks. Gradually the smaller banks loosened their purse strings, and now, instead of having practically no chance to borrow on future oil prospects, the independent operator finds banks eager to make loans to responsible operators.
IV
Proration was not a natural development in Texas; the conservation was fought bitterly by the independent producers and small landowners. Proration still is a fighting word in some small communities, because under it the average well is restricted to twenty barrels a day. But the legislature as far back as 1899 saw the need of conservation of the state’s new wealth, and passed an act providing for the plugging of abandoned wells, casing off of water, and prevention of reckless burning of gas. Since that time many additions have been made to the statutory law on proration. The act of 1917 was the first to give the state railroad commission powers of regulation. It was a fight that started with hundreds of leaders, with what might be called the stable element of the oil industry. And the fight is still going on, just as does any fight for law and order.
But, partly because of the tremendous waste through unnecessary drilling in the East Texas field, public opinion is changing in favor of proration. In the opinion of competent oilmen, more than 13,000 of the field’s 27,000 wells were drilled uselessly; the same recovery of oil could have been had without them. In short, more than $150,000,000 was thrown away in the mad grab to clean out the field.
East Texans are regarded — and rightly so from a look at the record — as among the most rugged of rugged individualists. When oil began spouting on their scrubby, hilly farms, they saw no reason why the state should say just how much they could produce a day. It took the National Guard more than a month to convince the East Texans that the law was the law, and since then constant supervision by the railroad commission has been necessary to check the running of ‘hot oil.’ Production of this illegal oil, over the allowable quota, has never been completely stopped.
Despite the vigilance of the inspectors of the railroad commission, ‘hot oil’ trucks roar nightly over the highways to Louisiana and Oklahoma. Books have been falsified and illegal oil routed through ‘by-passes’ from the wells to hidden tanks or into trucks. Bootleg gasoline is as common, and as hard to trace, in Texas as moonshine in the Kentucky mountains.
There is still a disgruntled minority who claim that proration, despite state law and the federal Connally Act which forbids interstate transportation of illegal oil, is a device engineered by the major oil companies to rob the ‘little man’ of his chance to cash in quickly on his oil holdings. But the majority of the six million citizens of Texas now side with the petroleum experts and are content to have supervision of the state’s rich deposits.
What proration means to a family which has a 100-barrel per day production on its hands is this: instead of flowing for an estimated three years unrestricted, without being pumped, the wells producing the 100 barrels will flow from ten to fifteen years, depending on the quality of the well. The usual royalty on leased land is one eighth of production, or 12½ per cent. That means that the family will receive a steady income of about $13 to $15 a day for ten to fifteen years instead of three years. Although most wells can be pumped after the natural pressure stops, the cost of production rises, and usually the pool has been exhausted.
The old-timers know how important conservation is to the oil industry. They have nightmare memories of markets which flattened the boom days. Oil at Spindletop went begging for three cents a barrel in the latter part of 1901 and in 1902. The ditches of the countryside were flooded with dangerous streams of black crude because there was no adequate storage. Some Beaumont residents, penny-wise, with an eye to the future market, dipped the oil from the ditches in buckets and stored it in their barns and back yards. Sour Lake was a dismal city of discouraged boomers on the day in 1903 when 100,000 barrels of oil sold for a flat $1000 — one cent a barrel. The same oil at market prices to-day would sell for more than one dollar a barrel.
The independent producer has benefited by proration and the general advance of the oil industry. Years ago the chief difficulty of the independent oilman was to get enough money to drill a well. Development to-day is on such a sound, scientific, and businesslike basis that many banks are eager to lend money to responsible operators with good oil prospects. It was not many years ago that oil wells were drilled on hunches, on the appearance of seepages or other surface indications. To-day a good deal of the gambling has been eliminated from the old wild-catting system. Development is based on geology and geophysics. The seismograph is the most successful instrument for finding underground structures. The torsion balance has discovered some fields, and the magnetometer has helped in spotting others. These efficient methods of discovery hastened proration to Texas oil fields. By the old hit-or-miss system, the usual result was that two rich oil fields were seldom booming at the same time, and in the long run the market had some sort of stability. With present-day methods, vast reserves could be tapped with little wasteful prospecting by the larger companies.
While geologists set the figure for the East Texas field at a tremendous total, petroleum engineers think that a million and a half barrels a day is the limit that the field could produce for any length of time before the pressure would be reduced to a point where the wells would stop flowing and have to be pumped.
In the ‘good old days,’ those top figures would probably have been the goal of the bonanza boys, who would have drained the state of its greatest natural resource. But with the present facilities for production, were the restrictions discarded, every producer would have to protect himself by drilling as many wells as possible to keep the other fellow from draining away the oil from under his lease; every landowner would insist on the greatest possible production to boost his royalties. A great industry would be wrecked. Oil would not be worth its transportation costs; tens of thousands of people would be thrown out of work; and the state would lose the bulk of the tremendous taxes the industry pays yearly to its treasury.
V
There are two kinds of oil boom that pay off in big money — one where a new field is found, the other where a new field is indicated by a few wells and leases go sky-high.
Kilgore is the heart of the East Texas field, with 700 producing oil wells inside the city limits. Out of the dusty cocoon of a sleepy village, Kilgore burst forth as a modern city, a city built mostly by ‘boomers.’ Within seventy-two hours after the first well was brought in, the town’s first daily newspaper, the Kilgore Daily News, was selling on the streets. A six-story hotel, complete with chromium gadgets, rose on the spot where the town’s drugstore had languished, marooned in a sea of red mud. It is typical of the town that the only vacant store space in the hotel is designed for a drugstore on the spot where the old one used to be. The modernistic bar is a busy place.
The original families of the village have become the ‘first families’ of the city —a doubtful social distinction, but potent in the bank-deposit class. Nearly all of these families came out of the boom swamped with money and the prospect of millions more, but they are not the ones who have staged the big show. The newcomers whose nimble fingers picked fat leases from the furious fire of the boom days are the ones who have built the pretentious projects (it would be gross understatement to call them houses), some of which cost between $150,000 and $200,000.
Kilgore has a night spot, a dime-adance palace which will accommodate some 2000 people. It is run by a matronly woman who has followed oil-boom towns for many years. The drillers, the roughnecks, the lease hounds, and — yes — the ‘ best people ‘ from miles about come to dance to hot swing music with their own ladies or ones supplied by the management at ten cents per go-round. Rules are strict. Nothing but beer is sold, a practice prescribed by state law for public bars but often calmly disregarded by the tonier places in the big cities. Girls must not leave the floor with patrons — before midnight. The lady herself lives in a modest house, does her own washing and housework, and drives a twelve-cylinder automobile, as do both her grown sons. One of the sons raises fine saddle horses.
Some sixty miles to the southwest is Rusk, just on the edge of the East Texas field proper and with only six producing wells in all Cherokee County. Yet the startled citizens of Rusk saw one of the greatest lease booms in the history of oil.
The boom left Rusk solid with ready cash and crammed with prospects, but still a Cinderella whom the magic slipper did not fit. The same old brown and red brick buildings flank the quiet courthouse square, just as they have done for generations. There is not a drilling rig in sight of the town. But the people are different. For a few furious months, Rusk was a hot town. Millions of dollars in lease money were dumped into the hands of the farmers and the townspeople who owned land out in the country. The town’s two banks saw their deposits jump from about $200,000 each to well over a million apiece in no time. A farmer coming to town with his eggs and vegetables couldn’t even edge into the square because cars were three deep there and others were parked, running board to running board, in a solid mass all over the few streets. Strangers, keen-eyed men in leather jackets who talked fast and had plenty of money, moved quickly about the streets and dashed out over the rutted red roads to call farmers from the fields and get them to sign leases.
Then began a general cleanup of bank notes, of indebtedness in general. Farmers whose fathers had made payments all their lives on mortgages which still roosted on the farmhouse gables came into the banks and slapped down the cash to put their homesteads in the clear. Judgments which had been on court records for years suddenly were wiped out.
For years one of the doctors had been treating the farmers in the countryside. Sometimes they could pay, many times they could not. One old lady called him in her last illness. She had no money and could raise none. To pay his fee and to repay the loan of $250 in cash which saw her out of this life and through a decent burial, she deeded him the mineral rights to her farm. Shortly after she died, the doctor received $52,000 for those rights.
Rusk is still untapped. One practical reason why: a well was drilled near the town and was allowed to flow with little regulation; the owner drilled another, and his production for the two wells was curtailed. He had gone to the expense of drilling another well, yet had little more return than from his single one.
Rusk at the present time awaits someone who thinks the field is worth the money to take it off the reserve list and develop it.
VI
Aside from the matter of financial and physical waste, conservation of oil has a great national significance for the United States. Without conservation of oil, one of the mightiest tendons in the strong arm of our national defense would by this time have been withered.
Texas is a great cotton state and a great agricultural state, but the value of its oil ‘crop’ of 1937 (the most recent year for which figures are available at this time) was more than double the combined value of its cotton crop and its farm produce, such as corn, wheat, oats, rice, grapefruit, oranges, and garden truck. The 521,000,000 barrels of oil produced, under proration, were valued at $650,000,000, compared with about $250,000,000 for the farm crops.
The importance of oil as a national asset is shown by comparison with the gold hoard of the United States, which amounts to 14 billions of dollars, more than half the monetary gold of the world. The nation’s petroleum reserves are valued at 15| billions of dollars.
Thousands of plain people in Texas have felt the Midas touch of oil. To most of them, it means a comfortable living; to a few, great wealth. The small landowner is getting his money in reasonable but steady amounts. A lot of the money is being spent for further oil development, some of it vanishing into dry holes, some of it touching off new riches. But the old extravagant days are over. The multimillionaires now are the ones who discover whole new oil fields, and have the good fortune or foresight to keep a large slice of the field for themselves, as George Strake did in the Conroe field, northeast of Houston.
Strake, a dozen years ago, was a clerk chasing a dream. Many people had the idea that there was oil at Conroe; Strake did the most about it. He stuck to his dream, and when the Conroe discovery well came in about 1928, he had enough land and leases to cash in. Strake’s actual wealth is not known, but it has been estimated at $30,000,000. Still in his forties, he has one of the state’s greatest oil fortunes. He has his private plane, his yacht for Gulf cruises, and recently bought the fabulous mountain castle, ‘Glen Eyrie,’ in Colorado.
The state of Texas profits the most. One third of the total of all state taxes comes from the oil industry. The great distances of the state have been spanned with good roads, and many more are in the making. Millions have been spent and many more millions are being spent to make its educational system a model. Whole cities owe their being to oil. There are ghost cities of cheap buildings and deserted streets where oil only visited for a short time. But the pay checks of tens of thousands of people in the state to-day are signed by oil. With the steadying influence of proration, the industry is the greatest economic force of the state.
Oil, Texans have found, is money. They keep it in the bank.