Finding critical lessons for both industry and government in the work of J. Howard Marshall II.
|Left to right: J. Howard Marshall, II; Oscar Wyatt, founder and chairman of Coastal Corporation, E.O. Buck, vice chairman (retired), Chase Bank Texas|
J. Howard Marshall II died 14 years ago. He was 90 years old.
Today, most people probably remember him as the rich old oil tycoon who married the buxom celebrity, Playmate, actress, and mother, Anna Nicole Smith, when he was 89 and she was 26. His death led to one of most disputed estate cases in history that continues even today, after the deaths of its primary contestants, Smith and Marshall’s son, E. Pierce Marshall.
The bizarre twisting of a simple probate matter by the federal courts stands now as a cautionary tale about federal judicial meddling in areas where the judges have little or no expertise. But one can wonder what Marshall’s legacy might have been if he had died, say, at age 88. What lessons might his life had taught then?
As a former vice president of the American Petroleum Institute, of which Marshall was once a board member and director, I would like to think that enterprising reporters might have looked at how he amassed the wealth that became the subject of such a tragic dispute. They might have discovered it was the result not of luck or chicanery. Rather, they might read his autobiography, “Done In Oil,” and learned it came from an education in how the oil industry in all its phases worked, an education that current leaders in both industry and government might apply to today’s difficult energy and economic environment.
Marshall entered the oil game smack in the middle of its most tumultuous and difficult times – the Great Depression. The Philadelphia Quaker and Magna Cum Laude graduate of Yale Law School didn’t begin as a champion of market economics but shifted by confronting its problems.
Marshall’s introduction to the oil industry came when, as Yale Law Journal editor, he investigated state regulation of oil production in Texas. The regulation, by the Texas Railroad Commission, was aimed at preventing a glut in production from depressing oil prices below cost and leading to a horrendous dumping of oil and flaring off of natural gas. His paper, “Legal Planning of Petroleum Production,” proposed price fixing as part of the remedy to the problem. It led to a subsequent article, which in turn led Franklin Roosevelt’s Secretary of the Interior, the irascible Harold Ickes, to bring Marshall to deal with economically disastrous overproduction in the oil industry.
The problem was the result of a particular legal doctrine related to resources that migrate, “the rule of capture.” All oil men know it. The rule essentially allows a person to drill a well below his or her property and have the right to sell whatever can be sucked up from under the ground, even if it was sucked out from under another person’s property.
The film “There Will Be Blood” provides an example of the rule in practice. At the end of the movie, Daniel Plainview, played by Daniel Day Lewis, is asked to purchase an oil and gas lease by a desperate Eli Sunday on land owned by Eli’s parishioner adjacent to Plainview’s other oil leases. Plainview tauntingly explains to Eli that the oil is gone: “Drained dry. I'm so sorry.” Cutthroat competition, Marshall found, wasted billions of barrels of oil and loosed trillions of cubic feet of natural gas in booms that ultimately led to both economic and energy bust.
But how to deal with it? When pushed by oil producers to prop up prices by setting a price floor, Ickes asked Marshall to put in place the kind of price controls his earlier articles advocated. In trying to develop a plan, he quickly discovered that setting a floor price was not merely impractical but effectively impossible. An order to set prices, he determined, would lead to black markets, so called “hot oil.” Shipments and sales of such hot oil would be impossible to control.
Instead of controlling prices and chasing down hot oil, he and others in the Interior Department devised a way to control supply by requiring certificates of clearance for legally produced oil – cold oil, as he called it. Through a Federal Tender Board, certificates could be tracked from oil leases at refineries and pipelines, focusing regulation on the few rather than the multitude of oil leases and gas stations.
The first swipe failed a constitutional test until Congress passed a new law authorizing such activity. But once in place, it helped eliminate much of the waste by appealing to everyone’s self interest -- states, refiners, oilmen, and consumers -- for more sustainable oil production and less waste.
Unfortunately, as Marshall relates, the lesson that one should minimally regulate and avoid counterproductive price regulation was lost upon subsequent administrations. In World War II, despite his best efforts as co-chairman of the interagency Petroleum Requirements Committee, rationing required by price controls imposed by John Kenneth Galbraith’s Office of Price Administration led to black markets and worse shortages than otherwise would have occurred. “Supply and price,” Marshall noted, “are the opposite sides of the same coin – something that few of the well-intentioned idealists with the OPA ever understood.”
From government, Marshall moved to the private sector, where he amassed fortune first as a lawyer for Standard of California, now Chevron, and then as an executive with independent producers such as Ashland Oil Co. and Signal Oil Corp., Union Texas Petroleum, and as co-founder of Great Northern Oil (now Koch Refining).
His ultimate lesson is that “the economics of oil obey(s) the laws of hydraulics. … It moves in a continuous stream, out of sight and under pressure from the wells, through the pipelines and refineries, through other lines of transports to filling stations, homes, and industry. Raise, lower, or alter the supply or demand at any point in this closed system, and the rest of the system is immediately affected.”
The Obama administration and Congress today desperately need to learn that lesson as they push proposals on cap-and-trade of emissions, seek new taxes on oil and gas profits, and keep much of the nation’s oil and gas resources off-limits.
For if they fail to heed the more significant lessons from J. Howard Marshall II’s life, they risk not only repeating the same old mistakes but dragging the nation through a longer period of economic and energy recovery than the sad estate case that followed Marshall’s death.
William O’Keefe, Chief Executive Officer of the George C. Marshall Institute, is President of Solutions Consulting Inc. He has also served as Executive Vice President and Chief Operating Officer of the American Petroleum Institute and held positions on the Board of Directors of the Kennedy Institute, the US Energy Association, and the Competitive Enterprise Institute. He is Chairman Emeritus of the Global Climate Coalition.