Oil's Second Century

Mr. Dunlop is President of the Sun Oil Com­pany. This article is from his remarks before the Delaware Oil Men’s Association at Wilmington, September 14, 1959.

Just 100 years ago, by the slim­mest of margins, Edwin L. Drake found a small, stray sand contain­ing oil at 69¹/₂ feet in a well drilled near Titusville, Pennsyl­vania. Call it a miracle or an acci­dent, no one else among the thou­sands who took to drilling wells in the woods of Western Pennsylvania ever produced oil from the same shallow sand. On the slender thread of this discovery hung the incentive that led men to give their time and invest their money in the search for oil. If they found it, it was theirs—and it could make them rich. Many of those who followed Drake did find oil. Many others, of course, found none.

To regard Drake’s success as an accident is less fitting than to re­gard it as a miracle. (I suspect it is only oil men who are tempted, in the throes of the vexatious problems thrust upon them, to think irritably that it was an acci­dent that the oil industry was ever born!)

To say that Drake’s success was a miracle, however, is to deny credit to the dogged determina­tion of that lanky, bearded man; it would be to renounce the axiom of our heritage that the Lord helps those who help themselves.

It surely may be regarded as a miracle, however, that in God’s scheme of things, millions of years ago there lived and died lower forms of marine creatures which became buried, and compressed, and transformed, that Man might one day have heat and light and an abundance of power. It is in this sense that we speak of natural re­sources—nature’s gifts. Yet how significant it is to recognize that one hundred and one years ago the United States had no petroleum resources. We are forced to con­clude that the petroleum resources we enjoy today are equally a prod­uct of the resourcefulness of men. Those who contend that oil and gas are nature’s gifts and so be­long to all the people are, to say the least, insufficiently critical in their analysis. Primitive, tribal, and civilized societies for genera­tion upon generation trod the ground over the vast oil reserves of the Middle East. Yet it was not until the 1930′s that the major discoveries were made and the de­velopment began of Middle East oil as we know it today—the rich­est single oil area of the world. If oil is truly a gift, why did not all those preceding generations ac­cept it and use it?

The answer, of course, is that natural resources are not wholly natural; nor are they resources until they are useful to people. Natural resources, plus man’s re­sourcefulness, equals progress.

I know of no study, but I would venture that nine-tenths of the world’s presently known oil was discovered by Americans or with American methods and equipment. Americans, as a group, have proven themselves to be the great­est oil finders and developers in the world. I contend that this is so because the incentive to Ameri­cans to be resourceful has been uniquely powerful under our eco­nomic concepts of competition, private management, and private property.

Oil Men Take Pride in Achievements

At this juncture in their his­tory, oil men share two feelings. One is the feeling of pride in what their resourcefulness has accomp­lished in just 100 years… aided and abetted, it is true, by the re­sourcefulness of interdependent industries—the automobile and aviation industries, machine tools, chemicals, and many others—all motivated by the same incentives. If the oil industry had done no more than light lamps and grease wheels, it would have made a great contribution to the material well-being of the American people. For it would have created re­sources where none existed before—it would have found the oil that hadn’t been found—and it would have made useful the raw, unus­able crude that came from the earth.

But it has done much more.

Today the glamour attaches to new petrochemicals created by petroleum science—the raw ma­terials for synthetics of many types. Crude oil and natural gas constitute a vast storehouse of such wonders today and even greater marvels yet to come. But basic to all else is the major con­tribution petroleum has made to the plentiful availability of low-cost energy. This has given the United States unsurpassed eco­nomic leverage. We account for more than 40 per cent of the world’s energy consumption, with only 6 per cent of the world’s pop­ulation. Nearly 70 per cent of our energy requirement is supplied by oil and gas. It is no wonder that we have enjoyed a standard of liv­ing unequalled anywhere at any time. As Newsweek magazine so aptly put it in an article this sum­mer, "the whole bountiful civili­zation of the mid-twentieth cen­tury is petroleum and the myriad economic and scientific reactions that it has stimulated or helped make possible."

In exercising their resourcefulness, oil men have been neither spoilers nor exploiters.

True, there was waste in the early boomtowns of oil, resulting from greed and also from insuffi­cient technical knowledge and in­adequate equipment. It was from within the industry itself, how­ever, that the initiative and states­manship came for the establish­ment of sound conservation prin­ciples and methods.

Despite the inflation of which we are all so conscious, petroleum products are a bargain in price. One of my associates joined the oil industry in 1914, and he likes to keep track of what has happened since then. His figures show that the price of the industry’s prin­cipal product—gasoline—is about 50 per cent higher today than in 1914, compared with a rise of nearly 300 per cent in the so-called cost of living index. In some coun­tries, low-priced products reflect low-paid workers, but my associ­ate’s records show that wages in the U. S. oil industry are up 1,000 per cent since 1914, and in addition petroleum industry employees are the recipients of fringe benefits of unequalled liberality.

By the tests which may be used to measure the social and economic performance of an industry, the petroleum industry ranks high in maintaining adequate (in fact, more often overabundant) sup­plies, in conserving resources, in developing new products, in im­proving the quality of conventional products, in competitive pricing, in treatment of employees. It has sought to reward its stockholders commensurately with their risks, but if there is a weakness on the industry’s scorecard I confess it is in this regard.

Restrictions Cause Profound Concern

Reviewing the facts of the pe­troleum industry’s performance, it is perhaps understandable that oil men regard their industry with pride. But as I mentioned a mo­ment ago, oil men share two feel­ings. The second is a profound con­cern.

In one of Edgar Allan Poe’s short stories—"The Pit and the Pendulum"—a man is trapped in a room whose hot metal walls are slowly closing in on him, forcing him toward a pit containing a hor­ror so monstrous he cannot de­scribe it. The terror in Poe’s tale lies in the man’s utter helplessness. Oil men are not so helpless, but the analogy is useful otherwise. Slow­ly, but inexorably, the freedom of the managers of oil companies to conduct their business in accord­ance with the dictates of the mar­ket place is being restricted. The walls are closing in. And the pit, as we know from the experience of all nations which have embraced totalitarianism, is too horrible to contemplate.

Already, half of the proved hydrocarbon energy reserves of the country are under federal gov­ernment control. The discoverer of natural gas can neither sell it in interstate commerce—nor stop sell­ing it once he has started—with­out federal government approval. The price at which he sells, should the sales be approved, is controlled by the federal government. Many of the contracts producers had made in good faith with buyers have been swept aside as invalid by administrative action of the fed­eral government. Today, the terms of tentative agreements between buyers and sellers are often changed by administrative action of the federal government during the lengthy process of contract ap­proval—a process which not un­commonly consumes two to three years. By administrative action of the federal government the buyer of natural gas is as likely as not to be required to pay less than he was willing to pay, and the seller has the choice of accepting the lower price or nothing.

In natural gas controls, the oil man is twice injured. Not only does the price he is permitted to receive for his gas limit his financial abil­ity to search for new reserves to replace those he has committed to sale, but the arbitrarily-estab­lished gas price is a regulator—and a depressant—of the price the oil man receives for his distillate and residual fuels. Such fuels com­prise more than a third of the total yield of petroleum products from crude oil. Thus oil men live daily with an example of the truism that the imposition of controls on one part of a free economy breeds addi­tional controls in the other seg­ments. Direct controls on gas pro­ducers who sell in interstate com­merce also indirectly regulate prices of gas in intrastate com­merce and the prices of a substan­tial percentage of our hydrocarbon energy supply which is in liquid form.

Liquids represent the presum­ably free half of our proven hydro­carbon energy supply. But oil men do not need to be reminded that managerial discretion in selecting sources of crude oil to meet refin­ery requirements has been sub­stantially supplanted by the admin­istrative discretion of the federal government.

In the interests of national de­fense the federal government has decreed that crude oil and petroleum product imports should be limited. This limitation is being accomplished through the manda­tory oil imports program under which a quota has been assigned to each importer. Surely equal treat­ment for all must have been a con­sideration of those who designed the quota system, but its result is unequal treatment. Worse yet, it freezes-in the unequal treatment and denies to the managements of individual companies the oppor­tunity to work out their own sal­vations, all facing an identical de­terrent to importation. A realistic tariff that would apply to all im­porters would constitute such a deterrent. Its great advantage is that it would leave the manage­ments of the separate, competitive companies free to exercise their ingenuity and to discharge their responsibilities to their stock­holders, employees, and customers according to their individual capa­bilities.* Such is the traditional method of a society which believes in a competitive economic system.

Oil men also find the walls clos­ing in on them as they attempt to meet price competition in the mar­kets for gasoline—their major product. In this area they are suf­fering uncommon harassment. This is disquieting enough. But the oil man’s greatest concern is over the ultimate destination of the course we are being required to take. What the federal government appears to be saying to the oil in­dustry is that a sheltered position must be maintained for everyone who engages in gasoline market­ing; that large marketers must not compete very vigorously with smaller marketers; and that price inflexibility is to be preferred—all in the name of preserving competi­tion!

If a large marketer reduces prices to a large number of dealers, he risks a judgment—not by a court, but by a quasi-judicial fed­eral government agency—of hav­ing engaged in "predatory" pric­ing. It he reduces prices to a few dealers, he risks a judgment of having engaged in "discrimina­tory" pricing. Oil men listen in amazement as a regulatory agency policy-maker asserts in one breath that "hard competition" is to be fostered, and in the next breath that the defense of a seller who has reduced prices should be disre­garded if he pleads, when he is brought to the bar, that he made the price reduction in good faith to meet the lower-priced competition of other sellers!

But price reductions are not alone suspect; price increases also are a source of difficulty—this time stemming from a different federal agency. This is a matter which may be unbecoming of me to discuss, since we will have quite a bit to say about it later on—in a Federal District Court.

If I appeared before you today only to recite the accomplishments of the petroleum industry in the past and to describe the trouble soil men face today, I would be guilty of wasting your time on su­perficialities. I have taken time for both, however, to sharpen a con­trast which must concern us if we are to get beneath the surface to the heart of our difficulties—which, I believe, are America’s difficulties as well.

Issue Will Decide Nation’s Future

If oil men’s problems were their own, unique to them, they would not be worthy of exceptional public notice and concern; all of us could regard them simply as conditions of the business—factors to be weighed by those who contemplate engaging in petroleum. But the fact is that such problems as I have touched upon are manifesta­tions of an issue that will decide our nation’s future.

Approximately 120 years ago Alexis de Tocqueville, reporting on his observations, wrote: "In Amer­ica… the citizen… never thinks of soliciting the cooperation of the government; but he publishes his plan, offers to execute it himself, courts the assistance of other indi­viduals, and struggles manfully against all obstacles. Undoubtedly he is often less successful than the State might have been in his posi­tion, but the sum of these private undertakings far exceeds all that the government could effect."

De Tocqueville’s description fits the climate of American ideas and ideals as Edwin L. Drake came on the scene.

Not much more than 80 years before Drake—60 years before de Tocqueville—the independence of these United States had been de­clared by men whose experience made them wise in the ways of governments. They were deter­mined not just to make this new nation free from domination by any foreign government, but to keep the people free from domina­tion by their own government. The unique political system they estab­lished enjoyed as its harmonious counterpart a unique economic system which, for the first time, put self-interest to work for the public interest. For a long time—certainly far beyond the days of Drake—those who followed were disciples and practitioners of the new meanings of liberty and inde­pendence. They were, if you please, skilled in dialectic Americanism.

We need such believers and ad­vocates today; articulate men fired with the conviction and the mis­sionary zeal to bring about a re­birth of faith in freedom, to re­store pride in self-reliance, to re­establish success as a worthy goal. We need such men because we have come to another of the periods in our history when we need imper­atively to know what we stand for. Do we stand for the system of polit­ical and economic freedom which the patriots of 1775 fought to se­cure for us? Or do we stand for a hybrid system which has borrowed some of the worst from feudal, socialist, and dictatorial systems we rejected so vigorously at an earlier time?

Let’s Not Let Freedom Die

The answer should be clear, yet the walls have closed in to a dan­gerous degree. I hope that succeed­ing generations cannot say of us that we lived in the grab-bag era of American history, out for what we can get today, unrooted in the past, uncommitted in our philosophy, unsure of our own capabilities, un­concerned about responsibility to the future. I hope they cannot say that we let freedom slip through our fingers because we didn’t understand or didn’t care.

This is a serious concern, for there is abroad in the land today the idea that if there are obstacles in the path, one should not strug­gle manfully against them, but should ask Washington to remove them. If there are problems, let Washington solve them. If he has succeeded and you have failed, ask for a transfer of funds. As this idea grows, our government comes to resemble less a republic than a perpetual plebiscite through which various groups seek to vote them­selves large shares of the good life.

Many Americans are already de­luded with the notion that we can simply vote full employment, high incomes, short hours, low prices, and complete economic security. Of course, we can no more do those things with impunity than we can vote to require that objects fall up rather than down. The conse­quences of the attempts already made are there for all to see in a vast federal bureaucracy, a swollen national debt, and a cancerous in­flation that has distorted values, penalized the prudent, rewarded the improvident, and, most unfor­tunately, undermined morality.

Such evidence does not in the least deter those who advocate greater governmental regulation of business, additional restraints on the functioning of free markets, and more onerous disincentives to achievement. It is proposed, for example, that Congress build new rigidities into the price system by requiring large companies to file advance notice of any price in­crease and to appear within thirty days thereafter to justify their in­tent at hearings conducted by the Federal Trade Commission. If we are to prohibit prices from regulat­ing the employment of the factors of production, our only alternative is government dictation.

It is proposed that Congress act to curb inflation by enacting a full set of price, wage, and rent con­trols to be imposed on the author­ity of the President under pre­scribed conditions—an example, if there ever was one, of attacking the symptoms rather than the dis­ease!

It is proposed that graduated in­come taxes be imposed on corpor­ate profits. Here the idea is appar­ently that the more people want the goods or services of a partic­ular company, and the more effi­cient that company is in supplying those wants, the more it should be penalized and the more stock­holders should be encouraged to in­vest their funds instead in other companies which aren’t doing such a good job, or which are producing goods or services that people don’t want so much.

I will mention just one more—out of a long list, I might say—be­cause it relates specifically to the petroleum industry. A determined effort is being made to have Con­gress reduce percentage depletion for oil and gas wells under the In­ternal Revenue Code. A number of supporters of the reduction joined in sponsoring a bill for a gradu­ated cut, the idea being that small producers would continue to be eligible for a 27¹/₂ per cent rate, medium-sized producers would be eligible for a 21 per cent rate, and large producers for 15 per cent.

Now the truth is that there is a percentage which represents capital—the value of the producer’s oil in the ground—which he depletes every time he produces and sells a barrel of oil out of a field or a cubic foot of gas out of a reservoir. That value is either 27¹/₂ per cent—lim­ited as it now is by the provision that the deduction may not exceed 50 per cent of. net income from each lease—or it is some other per­centage. But it isn’t one percent­age for one producer and another percentage for a second producer. Yet the most vocal advocates of a cut in percentage depletion for oil and gas have joined in proposing different percentages. This simply unmasks the campaign of this par­ticular group as inspired by the idea that the way to make political hay is by penalizing those who have managed to succeed.

I’m sure I need not labor further the point that we Americans need to decide what system we believe in. Tomorrow [September 15], Mr. Khrushchev, who happens to be­lieve in his particular system, will arrive for a visit on our shores. A month or so later, Mr. Eisen­hower is scheduled to visit in turn in the USSR. We may hope that these visits will contribute to an honorable easing of world tension. But we cannot ignore the announced goals of the Soviet Union, nor the long history of our difficulties with communist regimes. Mr. Khru­shchev has both asserted that he will bury us and proposed that we engage in friendly economic rival­ry. He and his associates are goal-centered, tough-minded, articulate believers in the superiority of gov­ernment planning, ownership, con­trol, and direction of the means of production. Realistically, his na­tion has discarded the socialist idealism of equal incomes for all—and even more the communist theory of from each according to his ability, to each according to his needs. Soviet production today is spurred by an array of incentives, both monetary and non-monetary. Indeed, the Soviet Union appears to have added incentives to achievement as fast as we have crushed them.

After more than a quarter of a century of intimate association with the oil industry as an out­standing example of the achieve­ments possible under a system of economic freedom, I have no doubts about the superiority of competi­tive capitalism over communism. And this is so whether the test is building a strong nation, improv­ing the material welfare of all the people, contributing to science and the arts, or in advancing moral and spiritual values. But in the con­test, we must make sure it is truly Freedom that contends with Com­munism.

That is our challenge in oil’s sec­ond century.

Foot Notes

*I am not here arguing for protection­ism but merely saying that, if the gov­ernment insists on a policy of deterring oil imports, the tariff is a more equitable device than is an import quota system.