Kemp: U.S. Crude Oil Stocks Return to 1930s Crisis Levels

U.S. commercial crude oil stocks last week hit their highest level since 1931 - when the opening of giant oil fields in the United States coincided with the Great Depression to create an enormous glut and sent prices tumbling to just 13 cents per barrel.

Commercial crude stocks at refineries and tank farms across the country rose to almost 407 million barrels on Jan 23, up from 398 million the week before, according to the U.S. Energy Information Administration (EIA) (http://link.reuters.com/jax83w).

Commercial stocks were the highest since the agency started collecting weekly data in 1982.

The parallels are not exact because production and consumption are so much higher now than in the 1930s. In 1931, stocks of 407 million barrels were equivalent to 160 days of nationwide production, while in 2015, the same stocks are just 44 days of production.

But monthly records stretching to 1920 show inventories have returned to levels briefly neared in April 1981 but otherwise not seen since the years between 1924 and 1931.

In October 1929, U.S. commercial crude stocks peaked at a staggering 545 million barrels , following the discovery of a series of huge new oil fields in Oklahoma, Texas, the rest of the Southwest and California.

In 1926, the first gusher had been drilled in Oklahoma's Seminole field, and by the following year the field was yielding 136 million barrels annually, 10 percent of the entire oil output of the United States.

Other massive new fields opened up in the late 1920s included Oklahoma City as well as Yates field (West Texas) and Van (East Texas), according to historian Gerald Forbes ("Flush Production, the Epic of Oil in the Gulf-Southwest" 1942).

At roughly the same time, oil was discovered at Signal Hill in California in 1923, the start of the super-giant Long Beach Oilfield within the Greater Los Angeles urban area.

The rush of new discoveries put an end to the peak oil fears which dominated the industry between 1919 and 1922 ("Petroleum Resources of the World" 1920).

But it also caused prices to plunge from $1.88 per barrel in 1926 to just $1.27 in 1929, $1.19 in 1930 and just 65 cents in 1931, according to the BP Statistical Review of World Energy.

Daisy Bradford's Farm
Tumbling prices stimulated attempts at controlling over-production through voluntary agreements or state government regulation, as Robert Bradley of the Institute for Energy Research has chronicled in his history of petroleum regulation in the United States ("Oil, Gas and Government" 1996).

But nothing prepared the industry for the discovery of the super-giant East Texas field in September 1930 when Columbus Marion (Dad) Joiner drilled his third well on Daisy Bradford's farm and it began to flow oil.

Daisy Bradford No. 3 marked the discovery of one of the largest fields the world has ever known and sparked an oil rush of epic proportions, according to the Texas State Historical Association ("East Texas Oilfield" 2010).

"Unlike earlier fields ... which were controlled by one or a few operators who developed them in an orderly plan, East Texas field had no plan and no governor," the state historical association explained. "Many landowners carved their holdings into small mineral leases that could be measured in feet, offering them to the highest bidder and realizing from $1,800 to $3,000 per acre."

"As the leasing frenzy seized the five counties of the field, Kilgore became the center of the boom. In that small town, wells were drilled in the yards of homes and derrick legs touched those of the next drilling unit. One city block in Kilgore contained forty-four wells. Whether in town or on farms, independent operators were compelled to drill wells as quickly as possible to prevent neighboring producers from sucking up their oil."

Martial Law in East Texas
Within 11 months, no fewer than 1,644 wells had been drilled into the new East Texas field. Oil prices, which had been 99 cents per barrel when Daisy Bradford No 3 was drilled fell to just 13 cents by July 1931.

"Oilmen responded to the lower price by increasing production, which sent prices even lower," the state historical society wrote in its essay.

In April, the Railroad Commission of Texas issued its first order restricting production from 200,000 barrels per day in the East Texas field to just 50,000. But it was ignored by many producers and invalidated by federal judges in July.

By the summer of 1931, East Texas field was producing 900,000 barrels per day from approximately 1200 wells, up from nothing just a few months before. In July, the governor called a special session of the state legislature to deal with the mounting crisis and increasing lawlessness in the oil fields.

A group of oilmen in favour of production controls appealed to the governor to declare martial law. On August 17, 1931 the governor ordered the Texas National Guard and the Texas Rangers into the oilfield to shut all 1,600 wells and restore order.

Thus began a complicated and not completely successful effort by the authorities in Texas and other oil-producing states, and later Franklin Roosevelt's New Deal administration, to limit oil production in order to raise prices, and ongoing challenges in the courts about whether the authorities were exceeding their powers.


Big New Fields and Oil Prices
The point of this historical excursion is that the chronology of oil prices has always been intimately entwined with the discovery and development of big new fields.

The discovery of huge new fields at Spindletop (1901) in Texas as well as Glenn Pool (1905) and Cushing Pool (1912) in Oklahoma helped push cash crude oil prices down from $1.29 per barrel in 1899 to just 61 cents in 1911.

Expressed in 2013 dollars, the real price of crude fell by 60 percent from around $36 per barrel to $15 between 1899 and 1910, according to the BP Statistical Review.

In the 1950s and 1960s, it was the discovery and production of massive new oil fields in Saudi Arabia, Iran and across the rest of the Middle East and North Africa that cut real crude oil prices from almost $20 in 1947 to less than $11 in 1970.

And during the 1980s and 1990s, it was big new fields in the North Sea, the Gulf of Mexico, Alaska, China and the Soviet Union, as well as increased energy efficiency and the substitution of cheaper gas for oil, that helped cut real prices from $60 in 1985 to less than $20 in 1998.

In the 2010s, North Dakota's Bakken and Texas' Eagle Ford and Permian Basin have reprised the role of Spindletop, the East Texas field and Saudi Arabia's mammoth Ghawar.

The Bakken, Eagle Ford and Permian have been developed in a far more orderly fashion than the crazy drilling that characterised the East Texas and Spindletop fields.

Any online search for "Spindletop," "Signal Hill" or "Kilgore" coupled with "oil" will reveal the forest of drilling derricks associated with those earlier oil booms.

The contemporary governors of North Dakota and Texas have not had to call out the National Guard or tried to shut in the oil wells, and there have not been the prodigious waste and spillages associated with earlier booms.

But the consequences of Bakken, Eagle Ford and the Permian Basin have been the same. Prodigious increases in oil supply in a short space of time which have outstripped demand. The result has been a big build up of crude stocks and a crash in prices.

Now prices have to remain low enough for long enough to slow down the drilling boom and stimulate demand to catch up.

By John Kemp