Oil's Second Century; R. G. Dunlop

OIL'S SECOND CENTURY tv Rotert q. ;])unfop JUST 100 years ago, by the slimmest of margins, Edwin L. Drake found a small, stray sand containing oil at 69~ 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 bornl) To say that Drake's success was a miracle, however, is to deny credit to the dogged determination of that 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.

97 98 ROBERT G. DUNLOP 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 abun dance of power. It is in this sense that we speak of nat ural 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 con clude 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, insufficient ly critical in their analysis. Primitive, tribal, and civil ized 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 pre ceding 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 re sourcefu Iness, equals progress. I know of no study, but I would venture that· nine tenths of the world's presently.known oil was discovered OIL'S SECOND CENTURY 99 by Americans or with American methods and equip ment. 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 Ameri cans to be resourceful has been uniquely powerful un der our economic concepts of competition, private man agemen t, and private property.

A Record of Wortby Achievements At this juncture in their history, oil men share two feelings. One is the feeling of pride in what their resource fulness has accomplished in just 100 years . . . aided and abetted, it is true, by the resourcefulness of interdepen dent industries-the automobile and aviation industries, machine tools, chemicals, and many others-all moti vated 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 syn thetics of many types. Crude oil and natural gas con stitute a vast storehouse of such wonders today and even greater marvels yet to come. But basic to all else is the 100 ROBERT G. DUNLOP 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 consump tion, with only 6 per cent of the world's population.

Nearly 70 per cent of our energy requirement is sup plied by oil and gas. It is no wonder that we have en joyed 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 eco- . nomic 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 boom towns of oil, resulting from greed and also from insufficient techni cal 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 fig ures show that the price of. the industry's principal prod uct-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 associOIL'S SECOND CENTURY 101 ate's records show that wages in the u.s. oil industry are up 1,000 per cent since 1914, and in addition pe troleum 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 petro leum 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 re ward 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 per formance, 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 inexor ably, the freedom of the managers of oil companies to 102 ROBERT G. DUNLOP 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 re serves of the country are under federal government con trol. 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 con trolled by the feq.eral 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 dur ing 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 re serves 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 re<;eives for his distillate and residual fuels. Such fuels comprise more OIL'S SECOND ·CENTURY 103 than a third of the total yield. of petroleum products from crude oil. Thus oil men live daily with an ex ample 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 sup ply which is in liquid form. G·overnment Regulation 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 se lecting sources of crude oil to meet refinery require ments has been substantially supplanted by the admin istrative discretion of the federal government.

In the interests of national defense the federal gov ernment has decreed that crude oil and petroleum prod uct imports should be limited. This limitation is being accomplished through the mandatory oil imports pro gram 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 sys tem, hut its result is unequal treatment. Worse yet, it freezes-in the unequal treatment and denies to the man agements of individual companies the opportunity to work out their own salvations, all facing an identical deterrent to importation. A realistic tariff that would 104 ROBERT G. DUNLOP apply to all importers would constitute such a deterrent. Its great advantage is that it would leave the manage ments of the separate, competitive companies free to exercise their ingenuity and to discharge their responsi bilities to their stockholders, employees, and customers according to their. individual capabilities. * Such is the traditional method of a society which believes in a com petitive economic system.

Artificial Competition 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 suf fering 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 say ing 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 in flexibility is to be preferred-all in the name of pre serving 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 oil: 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.

OIL'S SECOND CENTURY 105 engaged in "predatory" pricing. If he reduces prices to a few dealers, he risks a judgment of having engaged in "discriminatory" pricing. Oil men listen in amaze ment as a regulatory agency policy-maker asserts in one breath that "hard competition" is to be fostered, and in the next breath that the defens€ of a seller who has re duced prices should be disregarded if he pte ads, when he is brought to the bar, that he made the price reduc tion in good faith to meet the lower-priced competition of other sellers! But price reductions are not alone suspect; price in creases 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 ac complishments of the petroleum industry in the past and to describe the troubles oil 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 sur face to the heart of our difficulties-which, I believe, are America's difficulties as· well.

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 con ditions 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 mani~ 106 ROBERT G. DUNLOP festations 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 indi~ viduals, 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."

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 Tocqueville-the independence of these United States had been declared by men whose experience made them wise in the ways of governments. They were deter~ mined not just to make this new nation free from dom~ ination 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 be yond the days of Drake-those who followed were dis ciples 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; articu late men fired with the conviction and the missionary OIL'S SECOND CENTURY 107 zeal to bring about a rebirth of faith in freedom, to re store pride in self-reliance, to re-establish 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?

The answer should be clear, yet the walls have closed in to a dangerous degree. I hope that succeeding genera tions cannot say of us that we lived in the grabbag era of American History, out for what we can get today, un footed in the past, uncommitted in our philosophy, un sure of our own capabilities, unconcerned about respon sibility to the future. I hope they cannot say that we let freedom slip through our fingers because we didn't un derstand or didn't care. Let Us N at Abandon Freedom 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 suc ceeded 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 108 ROBERT G. DUNLOP which various groups seek to vote themselves large shares of the· good life. Many Americans are already de luded with the notion that we can simply vote full em ployment, 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 re quire that objects fall up rather than down. The conse quences 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 rigidi ties into the price system by requiring large companies to file advance notice of any price increase and to ap pear within thirty days thereafter to justify their intent at hearings conducted by the Federal Trade Commis sion. If we are to prohibit prices from regulating the em ployment of the factors of production, our only alterna tive 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 pre scribed conditions-an example, if there ever was one, of attacking the symptoms rather than the disease!

It is proposed that graduated income taxes be imOIL'S SECOND CENTURY 109 posed on corporate profits. Here the idea is apparently that the people want the goods or services of a particu lar 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 in vest 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. DepletionAllowance 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 Con gress reduce percentage depletion for oil and gas wells under the Internal Revenue Code. A number of sup porters 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 27~ 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 rep resents 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 cubjc foot of gas out of a reservoir. That value is either 27~ 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 per centage for one producer and another percentage for a 110 ROBERT G. DUNLOP 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, 1959], Mr. Khrushchev, who happens to believe in his particular system, will arrive for a visit on our shores. A month or so later, Mr. Eisen hower 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 an nounced goals of the Soviet Union, nor the long history of our difficulties with communist regimes. Mr. Khrush chev 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 be lievers in the superiority of government planning, own ership, control, and direction of the means of produc tion. 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 nonmonetary. 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 OIL'S SECOND CENTURY III association with the oil industry as an outstanding ex ample of the achievements possible under a system of economic freedom, I have no doubts about the superior ity of competitive capitalism over communism. And this is so whether the test is building a strong nation, im proving the material welfare of all the people, contribut ing 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.