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FDR’s New Deal with Energy: Part III (oil retailing)

By Robert Bradley Jr. -- January 10, 2019

“Despite over 400 prosecutions on over 1,800 reported infractions, effective enforcement for service stations was never achieved. For every disputed violation there was a hundred more, and federal judges were as inclined to dismiss code violations as they were to side with the government.”

“[One case] concerned the Babe Ruth Contest held by Jersey Standard in 18 states. With extensive advertising featuring Ruth himself, coupons were dispensed at Esso stations redeemable by children 18 and under for free baseball equipment and grand prizes of a trip to Yankee spring training. Although highly popular with motorists, federal authorities asked Jersey to drop the campaign. The company refused, and a suit was filed on January 15, 1934, to enjoin the contest as in violation of rules 16 and 17 of the NRA code. After continued pressure from the PAB, the promotion was discontinued.”

But what was FDR’s New Deal (1933–35) pertaining to energy? The real New Deal centered on petroleum and coal. Second, the New Deal was a crony enterprise, combining rent-seeking business interests with powerful federal bureaucrats working against consumers, taxpayers, and economic rationality. Third, it was about a police state to try to enforce command-and-control edicts.

[Part I detailed oil production; Part II described oil refining–Part IV next week will review the New Deal with coal.]

The description below on retailing is adapted from my 1996 treatise, Oil, Gas, and Government: The US Experience. (For more detail and documentation, see pp. 1,304–1,358.)

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On June 16, 1933, the National Industrial Recovery Act became law as a New Deal response to failed recovery.  Title I concerned petroleum marketing.  Each industry was to establish a binding code of fair practices for its members so long as “representative” of the particular industry and “not designed to promote monopolies or to eliminate or oppress small enterprises.” An Oil Code pertained to petroleum production, refining, and retailing.

Background

After the failure of the API voluntary code of fair competition (see pp. 1,330–1,344), the despondent gasoline retailing sector saw the law as a way out of the wilderness, providing what the API code could not–enforcement.  A day before the NRA became law, a meeting was held in Chicago by numerous oil industry trade groups, followed by secret meetings under API auspices in preparation for a general meeting of marketers and refiners the next week.

From June 22 to 24, some 59 marketing organizations, testament to the politicized nature of gasoline marketing in these early years, met to draft the “Chicago Code.”  The juncture for the new code, not surprisingly, was the API code, and chairing the conference was the familiar Roy Jones with code veteran H. T. Klein by his side.

Although major company spokesmen were at the helm, the floor and voting strength was overwhelmingly independent. With major sections of the existing code readopted, differences of opinion, generally following major­/independent lines, developed over lease‑and‑agency agreements and product price fixing. 

Failing to resolve the lease question, a dual rule was written for higher authorities to decide. Independents (and several supporting majors) prevailed on price regulation over tracksiders, who thrived off price‑cutting, and majors, who were wary of price floors becoming restrictive ceilings. The President was empowered to set maximum or minimum prices for petroleum products and to establish wholesale and retail margins upon the recommendation of the Code authorities.

Other additions to the first draft were a 24‑hour freeze period for posted prices, a prohibition on burner servicing with fuel oil sales, and open inspection of all company records for enforcement purposes.  A 52‑member Emergency National Committee was established, evenly represented by refiners and marketers, to assist the National Recovery Administration.  Of the 34 accepted rules, only two were disputed with one left unresolved. 

The consensus between historical rivals reflected the similar, if belated (on the majors’ part), marketing strategy of price competition ‑ and its unprofitable result.  Only the tracksiders , whose locational inconvenience for motorists was more than offset by low-cost dispensing from rail cars, were out of the mainstream.

After approved by the API board, the proposed code was forwarded to NRA Administrator Hugh Johnson, who returned the draft unapproved with the instructions to delete price fixing and formulate a labor code with hour maximums and wage minimums.  These changes were made, and on July l3 the code was resubmitted to Johnson, who called a public meeting before the National Recovery Administration to discuss changes.

At the conference several weeks later, divergent views continued to plague the resolution of the price and lease rules. Johnson settled the deadlock by omitting both rules and submitting the code for final industry approval. Johnson’s decision to remove standby price regulation resulted from an effective campaign from trackside operators, organized as the Independent and Individually Branded Petroleum Association, who lobbied Johnson to forego “rules or laws that would endorse or underwrite the mistake of over‑investment or over‑expan­sion,” and instead protect “the consuming public against excessive prices of petroleum pro­ducts.”

A labor section, a rule outlawing sectoral subsidization within integrated companies, a rule applying the code to all motor fuels, lubricants, and naphthas, and, to appease the Department of Agriculture, a rule exempting from code regulation farm coops marketing petroleum to its members were added to the code. An organizational change, finally, was made to replace the Emergency National Committee with a 9‑member Planning and Coordination Committee.

Johnson’s draft was at odds with powerful independent producers favoring price fixing and independent marketers lease‑and‑agency agreements. The ambitious Interior Secretary Harold Ickes, himself deeply involved in petroleum regulatory matters, lobbied FDR with an alternative code that incorporated the independents’ view.

A compromise between Ickes and Johnson was ordered, and intense lobbying resulted in an elaborated version of Johnson’s earlier draft with reincorporation of standby price regulation ‑ compromised by replacing “shall” by “may” and restricting the regulated grade to 60‑64 octane (middle grade) gasoline ‑ and a rule prohibiting lease‑and‑agency arrangements pending FTC review. 

On August l9, Johnson submitted the compromise to President Roosevelt, who immediately signed the code into law pursuant to Title I of the NRA. As part of the compromise, Ickes was named Oil Code Administrator with autonomy from Johnson.

NRA Code

The majority of the code, effective September 2, 1933, concerned marketing. A labor section (Article II, Section 3) set a 48‑hour maximum and prescribed minimum wages according to population density. Standby authority to fix gasoline prices was contained in Article III, Section 6(a).

For a test period of not to exceed ninety days, the President may prescribe the base price of the gasoline [in conjunction with determining the regulated price of crude oil] and, at the end of said period the President may revise the formula [currently set at the average price of 60‑64 octane gasoline price multiplied by l8.5] or add such additional formula relative to the wholesaling and retailing of petroleum and its products in such manner as in his opinion may be necessary to effectuate the purposes of the National Industrial Recovery Act.

In addition to labor and price regulation, thirty-one marketing rules were presented, the majority elaborating on API code rules with the remainder expanding or clarifying marketing regulation. The chart below gives the NRA Code number and a brief description.

NRA Code                   Content

Rules 1 & 2       Comprehensive applicability

Rule 3        Conspicuously posted prices without concessions; No coupon redemption at discount; No retroactive refund after price decline; Posted price freeze for 24 hours; No speculative purchases anticipating price rise

Rule 4        No sales below cost plus reasonable expenses

Rule 5        Maximum credit terms for bulk sales

Rule 6        No subsidization between stages within integrated firms

Rule 7        No equipment loans, leases, or sales; Fixed price schedule for equipment sales. Exception for cooperatives

Rule 8       No free construction or installation

Rule 9       No free equipment repairs

Rule 10     No free painting

Rule 11      No free equipment except trade‑mark pump globes

Rule 12     No unauthorized brand substitution

Rule 13     No loans

Rule 14     No payments for advertising   display privileges

Rule 15     No contract breaking

Rule 16     No prizes or games of chance

Rule 17     No free gifts

Rule 18     No free deliveries

Rule 19     No new lease‑and‑agency contracts pending decision

Rule 20    Station ownership allowed

Rule 21     No free bulk transfers to resellers

Rule 22    No free burner services with fuel oil sales

Rule 23    Open inspection of company records

Rule 24    No tax evasion

Rule 25    No misleading advertisements

Rule 26    Contract sales price allowed

Rule 27     No unauthorized brand name  use

Rule 28    Patronage dividends by cooperatives allowed

Rule 29    Coops exempted from code

Rule 30    Code inapplicable to pre-August 19, 1933 contracts

Rule 31     All code violations constitute unfair competition

Organizationally, the Planning and Coordination Committee was expanded from 9 to l5 members with eight subcommittees, one for marketing. The role of the PCC was to assist the NRA to ensure cooperation from the industry and enforcement of code rules. Approximately 8,000 industry individuals would volunteer in the effort.

Operation

Wirt Franklin, his own oil company struggling back from receivership, spoke optimistically of a new era for the industry as the new chairman of the PCC:

The American petroleum industry stood on the brink of ruin when l933 dawned. Everywhere was demoralization.  An over‑supply of crude petroleum, a diminishing market demand, a rapidly increasing tax bill, destructive warfares in competitive marketing, reduced stock values, increasing losses often wiping away the earnings of a lifetime, receiverships and imminent bankruptcies:  these made up the common outlook of our industry . . . All this is behind us. . . . Today for the first time in history, after years of strife, all factions . . . are endeavoring harmoniously to work out a program of cooperation . . . with a care for the future as well as for the immediate present. . . . We are now in a position to head the march back to prosperity for the whole nation…This is our own new deal. . . . It can win. . . . IT SHALL WIN.

The honeymoon period began when the code was signed in August. Product prices firmed on the expectation that prices would reach a several year high. To ensure a break from the past, however, politically powerful independents, led by Franklin, desired fixed floor prices at the production and retail levels.

Spurred by reports of coast‑to‑coast price wars, the PCC on September l4 formally recommended price‑fixing to Ickes, who had been appointed Code Administrator several weeks before.  Not only did Ickes decline the request, citing a 30 percent rise in retail prices and a several hundred percent rise in crude prices since passage of the NRA, he admonished the PCC for the direct request.  The PCC was advisory, he reminded them, and was to work with the newly created Petroleum Administra­tion Board.

This did not mean Ickes was complacent about regulation, his raison d’etre.  On September 25, the PAB announ­ced that penalties for code violators would be $500 per day, enjoinment, and, if necessary, licensing subject to revoca­tion. With continued retail price wars and East Texas overproduction, threatening demoralization so early in the program, Ickes announced October 16 that crude prices would be fixed at $1.11 per barrel with medium grade gasoline prices at $0.065 per gallon effective December 1, 1933.

Given the importance and volatility of price‑fixing, a conference was held in late November where vocal opponents aired their views and industry supporters revealed second thoughts. Persuaded by a coalition of majors, non‑integrated refiners, tracksiders, and the head of the NRA Consumer Board, Oil Code Administrator Ickes postponed the order one month to January 1. At the same time, prosecution of code violators began, one case involving premiums and the other case a failure to post prices. The indicted firms gave what would be recurring defense over the next l‑1/2 years ‑ violations were wide­spread, they were only holding their ground, and selective enforcement was unfair.

To forestall price‑fixing, the majors took matters in their own hands and announced a national program to stabilize the oil market.  Under threat from Ickes to agree or else, a pact was reached on December 7, 1933, among 25 companies representing 85 percent of the market to form the National Petroleum Agency to “purchase, hold and, in an orderly way, dispose of surplus gasoline which threaten the stability of the oil price structure.”

Admitting that “frankly, I am experimenting,” Ickes approved the National Marketing Agreement on January 19, 1934 with modifications. Price­‑fixing, mean­while, already postponed once, was moved back to February 1.

On January 29, 1934, price‑fixing was indefinitely postponed, and emphasis turned to the national stabilization plan to augment the marketing code. A revised plan was approved February 7 by Ickes, but problems would appear. As the cartel’s provisions became known, secret dealing began to circumvent if not outright violate the plan. Rumors abounded of jobbers sweetening the soon‑to‑be fixed $0.06 per gallon retail margin to gain outlets.

This development, and the existence of non‑member firms, promised compliance problems once underway.  But this would never be known.  On June 27, 1934, the Attorney General of the Department of Justice ruled against the cartel on antitrust grounds, and the next month, major marketers withdrew. This ended any national plan for stabilization; only in 1935, after several years of unsuccessful effort, did a West Coast stabilization plan survive Justice Department scrutiny and gain enforcement respect.

By early 1934, whatever existed of the honeymoon was over.  Code violations and circumven­tions were an open secret; the Association of Petro­leum Retailers described gasoline retailing as “worse off now than before adoption of the oil code.” With price‑fixing gone and a national stabiliza­tion plan by the wayside, the “settled strategy” was to enforce the thirty­‑one rules.  This pitted the self‑interest and ingenuity of profit‑seeking marketers against the PAB and supportive industry segments, a clash made more certain from the constitutional uncertainty over the NRA.  It was rule violation, rule circumvention, and legal challenges versus rule modification and enforcement.

Given the supply and demand conditions, the economic drive for retailers was to attract clientele and for consumers was to locate their best purchase and to overcome the discouragement from code rules.  This was accomplished for several reasons.  The code itself had limitations.

Low prices and price wars were inevitable because of regular shipments of distress oil, some “hot,” from East Texas. Tax evasion by jobbers also provided selectivity cheap oil for price warfare that the below‑cost rule (Rule 7) could not prohibit.  Other rules, such as Rule 6, which forbade subsidization within integrated firms, had no practical significance because of the inability to unambiguously disaggregate revenue­‑cost figures.

Second, loopholes and purposeful exclusions in the marketing code invited actions which promoted highly competitive markets. With no code stipulation on commercial discounts until February 20, 1934, commercial accounts teamed together to extract even larger discounts.  The failure of authorities to make a final decision on lease‑and­‑agency agree­ments led to open disregard of the interim rule (Rule 19); majors in the spring of 1934 often resorted to dealer agreements to interna­lize the otherwise illegal acts of providing free equipment and other inducements to secure outlets.

The most consequential exclusion ‑ or loophole as it turned out ‑ was excluding farmer cooperatives from the code (Rules 28 and 29).  Identified in early l934 by the National Petroleum News as a “modern racket,” oil jobbers actively promoted farmers to set up coops eligible to pass along quantity discounts (Rule 29) and rebate profits (“patronage dividends”) to member customers (Rule 28).

Consumers enjoyed significantly reduced fuel costs; jobbers welcomed a ready outlet. By mid‑1934, an estimated 600 cooperatives dealing exclusively in oil were in existence with even more selling oil on the side.  Even consumers found various subterfuges to qualify. In Washington, D.C., motorists paid a small fee to become licensed taxicabs to qualify for fillups at the coop.  A group of Harvard economists, in conjunction with their work on national economic planning, formed a coop for home delivery. “The ingenuity and resourcefulness of this type of operator,” said a trade journal in grudging respect, “is remarkable.”

Violating the spirit of the code, while not violating the letter of the code, allowed many other rivalrous activities to surface.  Favor‑trading between parties in indirect ways, such as extra service at the station and advertising sponsorships, was intended to outdistance the competition in a buyers’ market.  This was prima facia legal. Explained W. T. Holiday, the President of Ohio Standard: “There is a fundamental rule of statutory construction that if a statute in this way attempts to enumerate all the specific acts which constitute violation, then any acts which are omitted are not prohibited.”

Another strategy by the majors was to release split‑pump stations to leave only one pump for nonbranded gasoline.

In addition to the legal and extralegal, there was direct violation of code rules, which the government vainly attempted to stamp out through selective prosecution. Upon instruc­tion from the Department of Justice (and indirectly through PCC Compliance Director Russell Brown), local district attorneys brought suit against firms failing to post prices, firms giving away premiums ranging from soap to glassware to movie tickets, firms granting illegal credit terms, firms failing to freeze posted prices for 24 hours, and firms violating hour and wage regulations.

Two cases were highly publicized. On March 27, 1934, a federal grand jury indicted leading California marketers and their principals for selling identical gasoline under different brand names through affiliates at lower prices.  Indictments against California Standard Chairman K. R. Kingsburg and others leading code figures embarrassed Ickes and lead to a quiet settlement.

The second case concerned the Babe Ruth Contest held by Jersey Standard in 18 states. With extensive advertising featuring Ruth himself, coupons were dispensed at Esso stations redeemable by children 18 and under for free baseball equipment and grand prizes of a trip to Yankee spring training. Although highly popular with motorists, authorities asked Jersey to drop the campaign. The company refused, and a suit was filed on January 15, 1934, to enjoin the contest as in violation of rules 16 and 17 of the NRA code. After continued pressure from the PAB, the promotion was discontinued.

Despite over 400 prosecutions on over 1,800 reported infractions, effective enforcement was never achieved. For every disputed violation there was a hundred more, and federal judges were as inclined to dismiss code violations as they were to side with the government.  The problem of code enforcement was encapsulated by Warren Platt:

Unquestionably thousands of violations are being practiced everyday. . . . We have been waiting for almost a year now for the government to prosecute violators but the governmental mind is not made up yet, though a mess of cases has been sent out to federal district attorneys, who are having their troubles figuring out what it is all about.  Even [if] the government moves quickly . . . [the cases] would only be a drop in the bucket. . . . I have looked through files of some of these cases and they do not stack up so well. . . . The defendant can too easily, and perhaps quite properly, explain away the charges or blame them on an employee.  Anyway, they do not look like real crimes . . . to the end that the public gets its oil and gasoline cheaper.  It is going to be hard to excite a jury.

Not only circumstantial evidence but increasing doubts about the constitutionality of the NRA, beginning with the Panama decision in February 1934, hampered prosecution.  Enforcement in some areas was also subject to politics, as demonstrated by a lack of enforcement until after local elections were held.

At the one year mark, influential marketers went public with telling denunciations of the code.  Platt called on his readers to suggest “what . . . should be retained” in a new code. W. T. Holliday complained:

There has not been any serious effort at enforcement, even as to fundamental principles. The Marketing Code today is practically as voluntary in character as was the old code. . . . The question, frequently raised, of whether marketing control should be continued . . . is . . . academic.

From the government side, Administrator Ickes ridiculed marketers:

I have no doubt that in the race for gallonage … gasoline will in  course of time come to be free, leaving only lubricating oils from which to extract a reluctant profit…. Who will be so bold as to deny that it may come to pass that the tourist of the future will have to  trade in his Chevrolet or his Plymouth for a huge truck in order to be able triumphantly to carry home the radios and kitchen stoves and baby grand pianos that he will be able to garner as premiums from competing filling stations as he tours the country?

Ickes also advised marketers to “establish a birth control clinic” to “put some curb on the reproduction of service stations.”

In the next months, price wars raged with a “hands off” response by the PAB.  Despite nearly 300 modifications and orders since its beginning, the code was bursting at the seams.   State marketing groups were vocal.  Indiana marketers demanded immediate intervention by FDR, while New York, New Jersey, and Massachusetts firms threatened to suspend alle­giance.  Earlier in 1934, similar protests were heard from state marketing groups in Wisconsin, Pennsylvania, Ohio, and Michigan.

The Southwest was in a perpetual price war from the East Texas field, and the Pacific Coast contin­ued its maverick ways.  Trackside stations increased their market share from 5.2 percent in 1930 to over 7 percent in 1933 and 1934. Talk was heard of a new national marketing agreement to supplement the code, and in one hotly competitive area, a radio priest recommended public utility regulation to restore marketing stability. Whatever the legal status of the code, its practical effect was waning.

Demise and Stability

On May 27, 1935, the suspicion of lower court judges was confirmed when the U.S. Supreme Court declared important sections of the NRA, with particular mention of the codes of fair competition, unconstitu­tional.  In addition to vague delegated authority and only indirect affects on interstate commerce, the court found that the NRA unconstitutionally elevated “unfair competition” to monopolistic acts defined by the Sherman, Clayton, and Federal Trade Commission Acts.  Asked the unanimous court:

What is meant by “fair competition” as the term is used in the act?  Does it refer to a category established in the law . . . or is it used as a convenient designation for whatever set of laws the formulators of a code . . . may propose?  “Unfair competition,” as known to the common law, is a limited concept.  Primarily, and strictly, it relates to the palming off of one’s goods as those of a rival trader. . . . But it is evident that in its widest range, “unfair competition,” as it has been understood in the law, does not reach the objectives of the codes which are authorized by the National Industrial Recovery Act.

With the demise of the Oil Code, over 100 pending code‑related suits were dropped, and the Pacific Coast Petroleum Agency cartel was termi­nated.   Industry sentiment remained for a third code despite the outcome of the first two, however.  Several major midwest marketers announced they would continue to abide by the code, and several state marketing organi­zations endorsed a substitute code.

On June 5, 1935, a resolution was passed by the API to “recommend revision of the earlier code immediately to bring it into agreement with those marketing practices which are recog­nized by the individual as fair and equitable so far as this may be lawfully done and with the approval of the FTC.” On June 23, 1936, a draft code was adopted by refiners and marketers, which a month later was placed before the FTC.  But industry support was mixed, and sanctioned cartels and cooperation were a thing of the past. 

With strong words, the FPC denied approval.

One Comment for “FDR’s New Deal with Energy: Part III (oil retailing)”


  1. FDR's New Deal with Energy: Part II (oil refining) - Master Resource  

    […] 19 of my Oil, Gas, and Government: The US Experience, looks at the petroleum refining industry. (Part III tomorrow examines oil […]

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