Crude Politics: The California Oil Market, 1900-1940 / Edition 1

by Paul Sabin

Overview

Energy shortages, climate change, and the debate over national security have thrust oil policy to the forefront of American politics. How did Americans grow so dependent on petroleum, and what can we learn from our history that will help us craft successful policies for the future? In this timely and absorbing book, Paul Sabin challenges us to see politics and law as crucial forces behind the dramatic growth of the U.S. oil market during the twentieth century. Using pre–World War II California as a case study of oil production and consumption, Sabin demonstrates how struggles in the legislature and courts over property rights, regulatory law, and public investment determined the shape of the state's petroleum landscape.

Sabin provides a powerful corrective to the enduring myth of "free markets" by demonstrating how political decisions affected the institutions that underlie California's oil economy and how the oil market and price structure depend significantly on the ways in which policy questions were answered before World War II. His concise and probing analysis casts fresh light on the historical relationship between business and government and on the origins of contemporary problems such as climate change and urban sprawl. Incisive, engaging, and meticulously researched, Crude Politics illuminates an important chapter in U.S. environmental, legal, business, and political history and the history of the American West.

Product Details

ISBN-13:	9780520241985
Publisher:	University of California Press
Publication date:	12/13/2004
Edition description:	First Edition
Pages:	327
Product dimensions:	6.00(w) x 9.00(h) x 1.10(d)

About the Author

Paul Sabin is a senior research scholar at Yale Law School and executive director of the nonprofit Environmental Leadership Program. He has taught U. S. economic and environmental history at Yale University and the Harvard Business School.

Read an Excerpt

Crude Politics

The California Oil Market, 1900-1940

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By Paul Sabin

The University of California Press

Copyright © 2004 Regents of the University of California
All right reserved.
ISBN: 0-520-24198-3

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Introduction

Structuring the Oil Market

California's landscape and culture today depend on petroleum. Millions of gasoline-powered cars and trucks daily roar along eight- to ten-lane highways. Gasoline-powered tractors plow agricultural lands, and petrochemical pesticides and fertilizers protect lucrative crops. Highways and automobiles link California's cities with world-renowned park and recreation sites, ranging from lush, towering Yosemite National Park in the north to the roller coasters and fantasy attractions of Disneyland in the south.

When Californians cruise the Pacific Coast Highway, pull on nylon stockings, or savor a strawberry, they reap the benefits of petroleum. Stuck in traffic, breathing polluted air, or struggling with pesticide contamination and oil spills, they confront the oil economy's darker side.

Close ties to oil similarly bind other states. Houston and Atlanta residents rely as heavily on their cars as do Los Angelenos. Oil spills have hit Alaska and the Atlantic coastline; community activists struggle against refinery pollution in New Jersey and Louisiana; and recreational skiers and hikers drive to the mountains of New England and Colorado. Theeconomies of Texas, Oklahoma, Louisiana, and Alaska depend heavily on petroleum production, and Michigan relies equally on the automobile industry. California, as both a major producer and consumer of oil, thus offers a case history for the impact of oil on individual states and a microcosm of its penetration of the United States as a whole.

How did California, and the United States more generally, become so wedded to petroleum? The fuel's versatility and its natural abundance are certainly key factors. Petroleum is fluid, combustible, and an excellent source of hydrocarbons for petrochemical innovation. Technological advances by scientists and engineers have enabled private industry to extract oil miles beneath the ocean, to increase the energy drawn from each barrel of oil, and to devise thousands of ways to use petroleum's valuable hydrocarbons. But most of all, oil is a relatively inexpensive way to make things go. The question we have rarely thought to ask is, why is oil so cheap?

Generations of historians have viewed the United States' abundant natural resources as a key contributor to its prosperity and democratic institutions. In the 1890s, Frederick Jackson Turner credited "free land"; in the 1950s, David Potter described how a "people of plenty" built American democracy on a foundation of abundance; and in the 1990s, Gavin Wright used the nation's natural resource base to explain the "origins of American industrial advantage." Plentiful and well-situated agricultural land, fish, furs, forests, coal, and gold all have been seen as essential to our development. At first blush, the United States' petroleum history appears to fit this story line. At different moments in the past 150 years, oil gushers around the country, from Pennsylvania to Alaska, have flooded the market with oil. Observing the 1920s California oil craze, the economist John Ise described "growing stocks, overflowing tanks, and declining prices, frantic efforts to stimulate more low and unimportant uses ... dozens of new wells, and more oil, more oil."

Yet this abundance was made as much as discovered. In pre-World War II California, fragmented property rights in oil spurred an orgy of competition and production that rapidly depleted Los Angeles-area oil fields. Public land policies along the coast and in the San Joaquin Valley, enacted after fierce national and state-level lobbying, pushed more oil onto the market on terms generous to oil operators. Government regulation managed surplus production and contained the worst competitive excesses. A successful fight to protect highway funding helped spur the rapid expansion of major roads, creating a market for gasoline-powered vehicles. These are just some of the ways oil's abundance has been made.

Politics and policy determined how rapidly oil moved onto the market in California and how avidly it was consumed. By shaping both oil supply and demand, politicians, bureaucrats, and judges influenced the price of oil. State, federal, and local governments decided who would benefit from the oil boom and what share of oil production the government would retain for the public treasury. Politicians and judges weighed oil's threat to the quality of the environment and to other local businesses against benefits for oil operators, workers, and consumers. These petroleum politics disrupted earlier patterns of public land disposal and government promotion of canals, railroads, and streetcars. Yet new oil land leasing programs and the highway projects also resembled their predecessors, particularly in the way they promoted rapid resource extraction and channeled economic development toward a dominant mode of transportation. Petroleum politics ultimately changed the map of California in the twentieth century, and the housing, employment, and recreational expectations of its residents and visitors.

In studying the volatile politics of the oil economy, this book carries forward into the twentieth century the research of historians who have written about nineteenth-century economic development, federalism, and infrastructure like canals and railroads. Post-World War II scholars like Oscar and Mary Handlin and Louis Hartz found the roots of Franklin D. Roosevelt's New Deal in the activities of nineteenth-century state governments. They discovered an "American System," in which state governments planned, promoted, and regulated economic development.

James Willard Hurst's magisterial 1964 study of the Wisconsin lumber industry, Law and Economic Growth, carried to new heights this investigation of how government relates to the economy. Hurst divided the legal history of the lumber industry into component parts. He examined in extraordinary detail the distribution of public lands, awarding of transport franchises, taxation of timber production, establishment of a framework of contract, and absence of regional planning. Hurst explained how shortsighted political leadership had created a system that encouraged the Wisconsin lumber industry to clear-cut the northern forests, leaving behind a trail of social and ecological devastation.

My book about the California oil economy follows Hurst's long-overgrown trail into the thicket of public land policy, business regulation, transportation development, and public finance. Rather than take the market structure for granted and merely study how firms competed within it or, alternately, apply a simple ethical grid of corporate conspiracy to a complex history, the book examines how the California oil market changed over time in response to the interplay of political, legal, and economic developments. Sometimes corruption and greed drove the policy process. But in other instances, particularly in the Great Depression, differing conceptions of the public good, fairness, and equity also underlay political struggles and institutional innovations. The conflict between small-scale local operators and the corporate behemoth Standard Oil at Huntington Beach, for instance, was complicated by a parallel split over beach protection and oil drilling in California's coastal waters. Standard Oil managed to stand for beach protection and conservation while also signifying monopoly and corporate influence over the legislature.

As Hurst suggested in his pathbreaking work, economic activity, regardless of the sector, is structured by certain key institutional building blocks. I explore four of these building blocks of the California oil economy in the thematic chapters that follow: property rights, federalism, regulatory rules, and tax policies and investment.

The allocation of property rights by the national government underlay all further development of the oil economy. Some of the richest oil reserves in United States history lay beneath federal public lands in California's San Joaquin Valley. As a regional oil boom heated up in the first decade of the twentieth century, the federal government generously distributed lands according to nineteenth-century laws designed to thwart monopoly and encourage economic development. Small, interlocked landholdings intensified competition for common underground oil pools and resulted in the rapid depletion of oil reserves. When the federal government responded to political pressures by trying to change its oil-land policies, sympathetic western judges and politicians undercut federal initiatives on behalf of industry allies. The conflict laid bare characteristic patterns in litigation and lobbying in United States politics and law.

Because political power is dispersed in American federalism, the state government also made critical decisions about how to allocate oil lands. California's control of rich coastal mineral deposits gave it considerable discretion over how its oil resources would be developed and by whom. California quickly demonstrated the enduring significance of federalism. As real estate interests and oil developers battled over the future of the coast, the state politics of coastal oil deviated sharply from national struggles over oil fields in the dry, sparsely populated San Joaquin Valley.

Meanwhile, regulatory rules governing the oil business became the subject of a complicated political struggle. Oil's wild production cycles drove down prices, ruined investments, and bankrupted companies. Within the framework of property law and antitrust regulation, industry, state, and federal leaders searched for ways to control production. Their efforts ranged from voluntary cutbacks to state-imposed natural gas conservation and state and federal production mandates. Although oil operators fought over which form of legal or economic coercion to embrace, practically no one in or out of the oil industry called for a "free market" solution that would leave oil prices solely to the forces of supply and demand.

Regulation of oil production and the political allocation of petroleum resources were heavily shaped by the characteristics of petroleum underground and technological advances that facilitated extraction. Oil was found in California principally in the sparsely settled San Joaquin Valley, the well-populated Los Angeles Basin, and the nearby coastal waters off Southern California. Trapped in large reserves underneath subsurface geological structures, oil pools freely crossed surface property lines. This boundary-crossing mobility disrupted management strategies and intensified conflicts over ownership between neighboring oil producers. Regulatory regimes were further complicated by the need to manage natural gas production. Although oil rises to the surface like water in a well, the added upward pressure of natural gas, found in concert with petroleum, helped lift oil to the surface, maximizing production. Managing this natural gas, initially worthless except for its service to oil production, thus became intertwined with regulating oil. Technological changes also shaped regulation of the industry. In the decades before World War II, oil companies gained greater control over the depth and direction of drilling. These advances increased production and enabled operators to tap oil pools thousands of feet underground or far offshore. At the same time, oil companies also learned to extract more energy and value from each barrel of oil in the refining process, contributing to a glut of petroleum products that dragged down the market in the late 1920s and the 1930s.

Tax policies and investment provided a final key building block for the California oil market. Gasoline for motor vehicles dominated the oil market by the end of the 1930s, while sales of petroleum-based asphalt for highways helped bring additional profits to California oil companies. Public investment had spurred the stupendous growth of the railroad system in the nineteenth century. Now governments provided crucial financial backing for the highways that would link dispersed residences and businesses, providing a transportation backbone for commercial trucking, commuting to work, and recreational touring. During the pivotal years of the Great Depression, when California's government and railroads and streetcars limped along financially, the state highway budget grew steadily, protected by a semiautonomous institutional and financial structure. Railroad and streetcar networks stalled and staggered, while California spun an intricate web of highways. In the post-World War II period, however, the state found itself caught. Many Californians agreed by the late 1960s that the state had overbuilt its highway system. Even Governor Ronald Reagan, generally hostile to environmental regulation, called for action against automobile-related smog. The state had trapped itself in an automobile landscape of its own making, one that bolstered the market for petroleum through the remainder of the twentieth century.

The four key building blocks examined here-property politics, federalism, regulatory rules, and public investment in highways-demonstrate the extensive and ongoing role government played in the oil economy. There are, of course, other political factors beyond the scope of this book. The laws governing employer-employee relations helped determine the cost of labor to the industry. United States foreign policy, combined with agile political negotiating by corporate lawyers, influenced how much companies like Standard Oil of California invested in overseas concessions. And tax subsidies for drilling directly influenced oil company profits.

Searching for the Causes of Environmental Change

We live in a petroleum landscape. We know well the environmental effects of the Santa Barbara and Exxon Valdez oil spills, the implications of smog and freeways, and the threat of global climate change. But do we know the causes? My analysis of the California oil economy focuses on subjects like highway tax policy, which may seem quite removed from environmental politics and history. Environment and ecology are typically associated with trees, rivers, animals, and minerals-the stuff of nonhuman nature. Why focus on economic politics and law in a project that seeks above all to contribute to our understanding of environmental problems and solutions?

The California environmental movement after World War II coalesced in the fiery politics of oil spills, air pollution, and sprawling freeways. Environment activists have attributed these diverse problems to the production and use of oil. Yet blaming the oil economy begs a further question: how have we become so dependent upon oil and the automobile? To answer this question, we must turn from petroleum's well-known environmental impacts toward the institutional and political factors that shaped the California petroleum economy.

Continues...

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Table of Contents

List of Illustrations
Preface
Acknowledgments
Introduction: Structuring the Oil Market
PART ONE — Federal Property
1. The End of the Old Property Regime
2. The Politics of the 1920 Mineral Leasing Act
PART TWO — State Property
3. Beaches versus Oil in Southern California
4. "The Same Unsavory Smell of Teapot Dome"
PART THREE — Regulation
5. The Struggle to Control California Oil Production
6. Federalism and the Unruly California Oil Market
PART FOUR — Consumption
7. "Transportation by Taxation"
8. Defending the User-Financing System
Conclusion: The Politics of Petroleum Prices
Notes
Bibliography
Index