Edison to Enron: Energy Markets and Political Strategies
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Book 2 Internet Appendices Chapter 6: Meadows to Murchison
6.1 The Great Depression (1929—38)Internet appendix 5.7, Government Depression and Antidepression Policy and Insull’s Collapse (www.politicalcapitalism.org/Book2/Chapter5/Appendix7.html), explained the role of government intervention in both creating the artificial boom of the later 1920s and preventing recovery in the 1930s. Indeed, an evaluation of business practices in the oil and gas industry cannot be fully understood without appreciating the severe impact of the long-lived Great Depression, the most traumatic business event in United States history. Although Herbert Hoover is identified as following a laissez-faire economic policy in 1929—31, and Franklin D. Roosevelt is associated with policy activism, Hoover actually was the first New Dealer as “the precursor of Roosevelt and the New Deal” (Rothbard: 111). The Reconstruction Finance Corporation, for example, was created during Hoover’s term, although its loan to El Paso Natural Gas occurred in FDR’s first term. The fact that Hoover later rebelled against the system he helped launch (Rothbard: 143—45) does not change the fact that his programs began the New Deal, and he added his own alphabet of government programs to the mix. A major monetary deflation followed the stock market crash of October 1929. Stock values fell by 90 percent, and the money supply contracted by one-third between the boom of August 1929 and nadir of March 1933 (Skousen: 401—403). The general price level, meanwhile, fell by 20 percent, which raised havoc with bank loans and other fixed commitments that were denominated in pre-Crash dollars (Skousen: 401—403; Friedman and Schwartz: 299, 317—18, 332—34). Murchison’s Southern Union, in this regard, was imperiled by fixed debt that rose in real terms with deflation. The major theme of political economy is how government intervention leads to more intervention in the vain quest to solve prior problems with more of the same. Thus macroeconomic public policy created the instability that individual entrepreneurs sought to tame with specific acts of political capitalism. In energy, and more specifically (in the present book), natural gas and electricity, this occurred with our figures Samuel Insull, Clint Murchison, and John Henry Kirby. 6.2 Clint Murchison and Oil RegulationWellhead proration in Texas and other oil-producing states established a maximum rate of production. Legal production was called “allowables”; higher (illegal) production was called “hot oil.” Those for and against political control of oil production were arguing for their own short-term, dollars-and-cents advantage, not political philosophy (Bradley: 91—95, Nordhauser: 68—95). Jane Wolfe stated, “No man ran more hot oil than Clint Murchison” (82). Stated another writer, “The American Liberty Pipeline was so hot that you could fry an egg on it” (84). Clint admitted as much (Carleton: 97). Clint was a major producer in East Texas, and production ceilings per well imposed by the Texas Railroad Commission with help from the U.S. Department of Interior threatened the high throughput needed by his pipeline to meet refinery demand. Murchison strongly believed that the constitutional rights of private property trumped the government’s rationale for regulation, the latter based on the prevention of economic and physical waste associated with “low” prices (Van Buren: 88—89; Wolfe: 88). While the production of hot oil was illegal, subjecting Murchison to criminal liability, legal strategies such as transferring leases to different companies to stay ahead of injunctions could allow wells to flow at their natural (full) rate and keep authorities at bay. Hot-oil production was commonly done to keep up with one’s neighbors, majors and independents alike, to avoid drainage in commonly owned reservoirs. It was considered to be pro-consumer and pro-competition by many independents. East Texas was not a rate-sensitive reservoir, meaning that increased production today disproportionately reduced future output (Bradley: 218—21). This removed the classical rationale for oil regulation to reduce output to prevent damage to the reservoir, what was called in the state-level statutesphysical waste (Yergin: 249). For a free-market interpretation of oil production under the rule of capture and the shortcomings of the regulatory approach, see Bradley, chapters 2—4. Murchison financially backed the Independent Petroleum Association of Texas (IPAT) in the 1930s, an organization that opposed mandatory wellhead proration. Murchison also fought against natural gas price-regulation at the wellhead, as well as mandatory unitization of oil and gas reservoirs (whereby co-owners were forced into one plan to reservoir development). But this did not mean Clint was a principled proponent of open markets. He and IPAT advocated import restrictions on “cheap” foreign oil, as well as mandatory obligations on pipelines to ship tendered wellhead supply (Carleton: 63, 65). Murchison sought a “fair market at a fair price” for oil and justified import controls as a quid-pro-quo to domestic proration (Letter of May 31, 1949, to the Dallas Morning News, copy in files). And there was more to Murchison’s pragmatism against free markets (and for free markets). American Liberty built an oil pipeline in Florida with wartime government financing in 1941 (Van Buren: 113). The 200-mile Florida Emergency Pipe Line, completed in mid-1943 for $4.2 million, carried more than 19 million barrels of petroleum products during the war (Bradley: 803). And most of all, Canadian Delhi’s Trans-Canada Pipe Lines Inc. would require years of political maneuvering and a large government loan to reach the finish line, the subject of chapter 7. Murchison also lobbied after World War II and in the 1950s for the government to condemn the East Texas field, reverse the pipeline flow, and inject several billion barrels of oil in the 60 percent-depleted East Texas field as a national-security policy. There would be industry benefits, Murchison argued. With East Texas turned from a supply source to a demand sink, the national allowables program could be ended to allow U.S. producers elsewhere to produce at their maximum efficient rate. Oil imports from Iran, Kuwait, and Venezuela—all transported on tankers leased from England—would spread the wealth (Van Buren: 91—92, 315—16). The cost of producer/royalty buy-outs and the oil purchases did not have to be borne by taxpayers. Murchison, always thinking, proposed to substitute oil storage for gold storage by selling the gold held at Fort Knox. Still, domestic and foreign oil consumers would pay higher prices than they would in the absence of the injection program. The common denominator of most if not all of Clint’s positions was financial self-interest, not a principled position for or against government intervention. This contradicts Jane Wolfe’s conclusion (97) that “government regulation rankled [Murchison’s] free enterprise spirit” and Van Buren’s conclusion (91) that Murchison undertook a “lifelong struggle . . . against regulation in the oil industry.” Murchison as an “internationalist” who “believed in aid to underdeveloped nations” (Wolfe: 195) was undercut by his support for oil import restrictions, although his plan for government oil storage in the East Texas field (and later in the Conroe field) was intended to increase imports. Virtually all other independent oilmen associated with “rugged individualism” in this period advocated oil protectionism against cheaper imports. Prominent oilman Hugh Roy Cullen advocated high tariff walls for oiland all other goods (Kilman and Wright: 169, 216—17, 272). So did John Henry Kirby, nominally a free-enterpriser, before and during the Great Depression as discussed in chapter 10 and in Internet Appendix 10.7, John Henry Kirby and Protectionism (www.politicalcapitalism.org/Book2/Chapter10/Appendix7.html). Murchison’s support for states’ rights in matters such as offshore leasing, and his opposition to federal regulation such as public-utility regulation and federal price controls, was also predictable given his narrowly conceived financial interests. Since the inception of the oil and gas industry, the hallmark of its entrepreneurs and companies has been a tendency to put short-range pragmatism over long-range principle whenever money is on the line, while reserving a sideline (default) position favoring free markets (Bradley, chapter 30). 6.3 Murchison and Handshake IntegrityIn the heyday of Clint Murchison, the oil and gas industry depended on handshakes and integrity in place of “lawyering.” This is made evident in the books written on Murchison (Wolfe and Van Buren) and also in books about J. R. Parten (Carleton: 570—71), Everette DeGolyer (Tinkle: 213—14, 292—93, 304), Hugh Roy Cullen (Kilman and Wright: 44—45, 164), and H. L. Hunt (Hurt: 44, 54, 61). Unfortunately, a book has not been written on the secretive life of one of America’s early billionaires, oil and gas producer Sid Richardson. A better understanding of his energy career and participation in politics would be valuable for history. In an era of high transaction costs, integrity was essential so that agreements could be counted upon to allow a reasonably efficient market. Those who broke their promises—even when the contracts were made only with a handshake or eye contact—developed a reputation as unreliable and had trouble making later deals. In Murchison’s words (Wolfe: 94), “Oil is a fairly small fraternity. If you cheat someone in this business, it catches up to you, and then no one will deal with you.” Murchison made the same point in a different way (Wolfe: 92): “I never made a deal where I couldn’t go back to the same person and make another.” High debt and going broke were common in Murchison’s heyday (Wolfe: 94). This was a result of
The contributions and character of Clint Murchison have been confused with the troubled life and career of Clint Murchison Jr. Clint Jr. was a notorious philanderer and unfocused businessman, as described by Jane Wolfe in The Murchisons. The bankruptcy of Clint Jr. in 1985 followed the death of his father in 1969 and his uncle Frank in 1979. Clint Jr. had personality issues that might have plagued him in any endeavor, but Clint Sr.’s decision to push his son toward business rather than an academic or technical career may have been fateful (Wolfe: 441—42). 6.4 Other Murchison Political InvolvementWell-known authors have commented on Murchison’s career in oil politics and particularly the political campaign contributions of Murchison and other wealthy oilmen such as Sid Richardson, Perry Bass, H. L. Hunt, and Hugh Roy Cullen. The Brown brothers, George and Herman, very close to Lyndon Johnson, also traveled in the same circles as Murchison, which furthered his relationship with LBJ (Caro, 1982: 614, 627—28; 648—49; Caro, 1990: 272—74; Caro, 2002: 407). In his book Cronies: Oil, the Bushes, and the Rise of Texas, America’s Superstate, Robert Bryce stated:
Robert Caro and other writers who paint the political activity by wealthy oilmen as ipso facto opposed to the national interest fail to consider the social welfare gains from their positions that were pro free market. Wellhead price controls on interstate natural gas, for example, were bad for the gas producers and gas consumers. Not only did shortages disrupt economic activity, more-polluting fuel oil and coal stepped in for the wounded gas industry in the 1970s and early 1980s. Few, if any, economists would say that wellhead price controls on natural gas (or later petroleum price controls) were worth it. Murchison was involved with Joseph McCarthy and the “Red scare” (Caro, 2002: 250, 546) and other political funding (Carleton: 63, 65, 130, 426, 426, and 452—53). Murchison’s early support for McCarthyism, however, was reversed when he concluded that McCarthy’s Communist accusations were exaggerated and the senator himself was unreliable and of questionable character (Wolfe: 196, 199—202). Sources for Chapter 6 Appendix Bradley, Robert, Jr., Oil, Gas, and Government: The U.S. Experience, 2 vol. Lanham, MD: Rowman & Littlefield, 1996. Bryce, Robert. Cronies: Oil, the Bushes, and the Rise of Texas, America’s Superstate. New York: Public Affairs, 2004. Carleton, Don. A Breed So Rare: The Life of J.R. Parten, Liberal Texas Oil Man. Austin: Texas State Historical Society, 1998. Caro, Robert. The Years of Lyndon Johnson: The Path to Power. New York: Alfred A. Knopf, 1982. Caro, Robert. The Years of Lyndon Johnson: Means of Ascent. New York: Alfred A. Knopf, 1990. Caro, Robert. The Years of Lyndon Johnson: Master of the Senate. New York: Alfred A. Knopf, 2002. Friedman, Milton, and Anna Schwartz. A Monetary History of the United States, 1867—1960. Princeton, NJ: Princeton University Press, 1963. Hurt, Harry. Texas Rich: The Hunt Dynasty from the Early Oil Days through the Silver Crash. New York: W.W. Norton, 1981. Kilman, Ed, and Theon Wright. Hugh Roy Cullen: A Story of American Opportunity. New York: Prentice-Hall, 1954. Nordhauser, Norman. The Quest for Stability. New York: Garland Publishing, 1979. Rothbard, Murray. “Herbert Hoover and the Myth of Laissez-Faire,” in Ronald Radosh and Murray Rothbard, ed, A New History of Leviathan: Essays on the Rise of the American Corporate State. New York: E.P. Dutton & Company, 1972, 111—45. Skousen, Mark. The Making of Modern Economics. Armonk, NY: M. E. Sharpe, 2001. Tinkle, Lon. Mr. De: A Biography of Everette Lee DeGolyer. Boston: Little, Brown and Company, 1970. Van Buren, Ernestine. Clint: Clinton Williams Murchison. Austin: Eakin Press, 1986. Wolfe, Jane. The Murchisons: The Rise and Fall of a Texas Dynasty. New York: St. Martin’s Press, 1989. Yergin, Daniel. The Prize: The Epic Quest for Oil, Money & Power. New York: Simon & Schuster, 1991. |