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Supreme Court to the original law, in that a definite standard is laid down by the Congress and the law applied without any preliminary finding or declaration by the Executive as a prerequisite thereto. This is the principal change made by the last Congress following the action of the Supreme Court in the cases involving the constitutionality of section 9-C of the National Industrial Recovery Act.
In 1933 the petroleum industry was adversely affected, like all industry, and with the price of crude oil dropping in many places as low as 10 cents per barrel there followed in the flush fields, and especially in the great east Texas fields, an almost total disregard for proration orders, and what was claimed to be decisions as to the production ability of such fields based on sound conservation theories. Producers receiving less than cost for their product, and having within their grasp the mere turning of a faucet to obtain unlimited quantities. of a resource of such economic value, resorted to almost every conceivable means to defeat the effort of the States to conserve this natural resource. The production of oil in excess of the amount allowed to be produced by State order takes place, to some extent, at all times and does today, but it reached such outrageous proportions in 1934 that "hot oil" (as the quantity produced in violation of State law is termed) became the concern of not only the State within which production took place, but the Nation as a whole. The small producing States where the pumping wells prevail were concerned, because they could not compete with this great amount of excess cheap oil produced below any figure which they could even begin to meet. The authority of the State concerned was challenged and a break-down of their enforcement machinery-due in part to conditions beyond their control-caused a bad moral situation. From a national standpoint it was claimed, and we think rightfully so, that this great resource, limited in quantity and indispensable to the functioning of our Government, both in war and peace time, was being extravagantly wasted and all conceded theories of sound conservation were being abused if not ignored. There were those who advocated, because of the seriousness of the situation, the virtual regimentation of the great petroleum industry, now the second largest in the country, within the powers and control of the Federal Government. In fact legislation presented went so far as to extend such control to the actual dictation of the Federal Government of almost every phase of the industry's activities. In lieu of the enactment of such legislation, Congress in 1934 authorized an investigation of the petroleum industry, and there was appointed for that purpose a committee, the personnel of which was the same as the subcommittee which considered this bill.
The hearings and report by this special committee have long since been exhausted because of the demand therefor. The investigation covered largely the technical side of petroleum-that is, as near as could be determined-the status of the known reserves in the country, methods of production, refining, transportation, and marketing, and the general public interest involved therein.
Recognizing that production of petroleum, because of the law of capture, and without any determination by the courts as to whether it lies within the power of the Federal Government to legislate even upon the subject of production in order that waste of such natural resource be prevented, as a committee, we gave encouragement to the governors and other representatives of the oil-producing States to
the formation of an interstate compact. As is known, such a compact was entered into by Oklahoma, Texas, California, New Mexico, Kansas, Illinois, and Colorado, and later ratified by the Seventy-fourth Congress. As the compact in question expires September 1937, it is our information that a renewal of that document is in the making and will be presented to the present Congress at a later date. For the information of the House, the consent of Congress as referred to is found in Public Resolution 64 of the Seventy-fourth Congress. It was further determined that due to the ease with which the proration orders could be violated and the difficulty from a legal standpoint for the States to prohibit shipments in interstate commerce of oil so produced, that the purposes and ideas behind the Connally Actthat is, 9-C of the National Recovery Act-were for a temporary period at least sound and advisable. This committee therefore recommended in February 1935 the enactment of the Connally Act for a period of 2 years to expire on June 16, 1937.
Later, H. R. 9053, reported to the House in August 1935, containing as it did, with some disagreement, what might be termed the final report of the special committee of 1934, transferred the administratior of the Connally bill to the board established therein. The committe again at that time kept the Connally bill in effect for a temporary period only. This bill, while it did not pass--with the exception of the recommendation for a new agency of the Government, now found because of the administration of the present Petroleum Conservation Division possibly inadvisable-might well be considered as a permanent policy of the Government dealing with the petroleum industry. The law which this bill extends applies particularly to the five States of Kansas, Louisiana, New Mexico, Oklahoma, and Texas, which in the aggregate produce about 75 percent of the national oil output and each of which has enacted State laws whereby the production of crude oil may be regulated so as to prevent waste. The Connally law will not apply in the remaining oil-producing States until such time as said States have adopted similar regulatory legislation. It does not determine the amount of oil which may be produced in the United States or from any State or from the fields and wells within a State. Each of the five States at present authorized by State law to do so determines for itself the amount of oil which currently may be produced without waste from the fields and wells within the State and, in doing so, takes account of all available and relative information with respect to the demand for oil, on the basis that production in excess of demand may in itself lead to waste. The existing law aids the States in the enforcement of these policies, by prohibiting the use of the facilities of interstate commerce in the transportation of such excess oil. Experience prior to the adoption of the existing procedure demonstrated that oil produced in violation of State law found its principal market in interstate commerce.
Although the operation of the present law, as stated in letter from Secretary Ickes (printed in this report), has been of material benefit to the independent petroleum refiners and the independent petroleum retailers, evidence presented to the committee indicates that its principal merit lies in the support which it gives to the State oil and gas conservation laws. Noteworthy examples of the benefits which will accrue to the public from such support of State conservation laws were presented to the committee. For example, the continuation of the present State regulatory measures in the east Texas field and the
support given thereto by the Federal Government under the present law are expected to result in an increased recovery of oil which, according to minimum estimates, may be equal to the quantity of oil which might result from the discovery of 60 new average-sized oil fields.
The law provides that when the President finds it necessary or appropriate for the enforcement of the provisions of the act, he shall require certificates of clearance, or tenders, for petroleum and petroleum products moving in interstate commerce from any particular area and shall establish a board for the issuance of such certificates. During the 2 years in which the law has been operative, it has been found necessary to require certificates of clearance from but one area, that being the east Texas oil field. The importance of this field as a future source of oil supply to the Nation is shown by the fact that it produces nearly as much as the aggregate production of all of the wells in Louisiana, Kansas, and New Mexico, and at the time of its discovery contained more than one-fourth of the oil reserves of the entire United States. The Federal Tender Board operating in that area issues about 6,000 certificates of clearance annually, involving about 222,000,000 barrels of petroleum and petroleum products, at a cost of about one-tenth of a cent per barrel.
A report of the Tyler, Tex., branch office of the Department of Justice shows that, up to December 31, 1936, the Government instituted 222 criminal prosecutions directly and indirectly involving the Connally law, and as of that date had obtained 176 favorable decisions in said cases and no unfavorable decisions. There were instituted also 26 civil cases directly and indirectly involving the Connally law, in which the Government was successful in 24 of the cases. Out of a total of 248 criminal and civil cases, the Government has been successful in 231, unsuccessful in 2, and has pending 15. The constitutionality of the act has been sustained in the United States District Courts. for the Southern District of Texas, the Eastern District of Texas, and the Western District of Louisiana, and has been upheld by the Circuit Court of Appeals for the Fifth Circuit in three cases.
The operation of the existing law has had the further desirable. effect of permitting the Federal Government, through the agency established by the President under the law to keep in constant touch with the petroleum industry in a more intimate way than would otherwise be the case. We regard this as extremely important in view of the fact that the production of oil has increased in the last 3 years approximately 40 percent, and yet new discoveries have not increased our known reserves over that of 3 years ago to the point that would justify such a large increase in production. In other words if, as some feel, the reserves of petroleum said to exist 3 years ago would be exhausted in approximately 15 years to meet the demand at that time, then with the large increase in demand at this time without a corresponding addition to our reserves, the concern of the States enjoying the possession of this resource and the policy of production pursued by them becomes a concern of the National Government also. The bill before us, identical with S. 790 (the Connally bill) which has passed the Senate, makes the existing law permanent.
The committee recommends an amendment extending the law to June 30, 1939. We do this for numerous reasons. While the law is in aid of all States having conservation statutes, it has functioned solely in east Texas and the large resources of that State make the
statutes of the State of Texas of principal concern. The Texas conservation law is temporary and expires September 1, 1939. It was testified in the hearings by a former chairman who represented the Railroad Commission of Texas in the hearings, that if this law was not extended the problem could be handled by the State. The committee doubts the entire accuracy of this statement, but is strongly of the opinion that the commendable improvement which has taken place in the east Texas field in the past 3 years and the higher respect for the proration orders of the State commission, evidenced by the scarcity of excess production, might result at a later date in such a statement being justified. The present law has been criticized by some independent jobbers who claim that it has curtailed production and created a monopoly resulting in price fixing and the establishment of margins too low for the little independent jobber to operate. It was admitted, however, in the hearings by those taking this position that litigation now pending in which violations of the antitrust law is the basis, because of price-fixing tactics, was encouraged and supported by their group and covered to their mind the objections which they presented to this bill. In other words, the amendments suggested by them were not germane to this legislation and were really violation of other law. Without commenting on this litigation we feel that the determination of that case is important before this law is made permanent. The interstate oil compact pledges the States as parties thereto to the enactment of sound conservation and waste-prevention statutes. This compact expires September 1, 1937. The committee believes this presents an additional reason for the present law not being made permanent.
It is important, of course, to know the expense of the administration of this act. Excise taxes on oil production and refining imposed originally for the purpose of covering the cost of petroleum administration, amounted to $1,237,000 for the 1936 fiscal year. For the months from July 1936 to March 1937 the tax collection has totaled $647,000. This revenue must in fairness be claimed by the board administering the law before us. It is to the credit of the Interior Department to be able to state that instead of asking Congress for the entire amount so collected they have expended less than $300,000 a year for the total expense of carrying out the provisions of the present law. In other words, the revenue derived from existing taxes for the purposes of the present law amounts to over four times the sum expended, so that from an expense standpoint it is a profitable venture for the Government. We have little doubt that should this law not be extended there would be a request for the repeal of the present excise tax of one twenty-fifth of a cent on produced and also on oil refined.
This bill has the support of the Secretary of the Interior which Department administers the petroleum law, the Railroad Commission of the State of Texas, other state officials and boards, the Western Petroleum Refining Association, the American Bar Association, the Independent Petroleum Association, the Independent Association of Oil Field Workers, etc., and others found in the hearings.
It is strongly felt that the present law should not be made permanent at this time.