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R!deral Reserve Bank of Dallas

Business Review

I
July 1976
Bicentennial PerspectiveDevelopment of the Texas Oil Industry
. - • - --

.......=- ..

Industrial ProductionNew Louisiana Index Dominated by Mining

This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org)

Bicentennial Perspective-

Development of the Texas Oil Industry
The nation's bicentennial year
coincides with the centennial for
the Texas oil industry. Over the
past hundred years, growth of
Texas oil helped revolutionize the
energy industry in the United
States and accounted for much of
the industrial growth of Texas
itself. Very large oil discoveries
prompted the development of
Texas pipelines, refining, petrochemicals, and oil field equipmentindustries that, even today, are of
prime significance to the state's
economy.
Growth of Texas oil production,
processing, and related industries
was spurred by fundamental innovations. Refining techniques were
developed to maximize the yield
of gasoline from a barrel of crude,
and the quality of gasoline was
significantly improved. The petrochemical industry developed a
whole new series of rubber, plastic,
and other products to meet the
needs of consumers and industry.
And given the high risks in explo~
ration and development, Texas
bankers had to come up with
major innovations to meet oilmen's needs and yet protect bank
depositors and owners.
Early in its history, the Texas
oil industry had to rely on knowhow, equipment, and financing
from outside the state. But as the
industry matured, the state's role
gradually reversed. Today, Texas
is a world supplier in these areas.
Beginnings of Texas oil
Small amounts of naturally occurring Texas oil found commercial
use as medicine and waterproofing
even before Texas achieved statehood. But true exploration and
commercial production began in
1866, when Lyne Barret struck oil
with a 106-foot well that produced
10 barrels of crude a day. This
Business Review I July 1976

well was brought in barely seven
years after Edwin Drake drilled
in the first American discovery
in Pennsylvania.
Barret attracted skilled labor
and technology from Pennsylvania to find more oil. But in the
end, his search was abandoned
because of inadequate financial
backing. Financing-particularly
for exploration-has continued to
present a challenge to the industry.
Banks and other financial institutions have generally not been
able to bear the risk of loans for
exploration. From the beginning,
the independent operator has
borne the brunt of exploratory
drilling-sharing the risks with
individual backers.
Even in the early years when
primitive-sometimes even homemade-equipment was used, drilling
was expensive. The first large flowing well in Texas was drilled in
1886 in the Nacogdoches area by
a company having capital of
$100,000, which was very strong

financial backing for that day.
While this well brought in 250 to
300 barrels a day at first, it was
not profitable for long. By 1890,
activity in the Nacogdoches area
had faded, and the next few years
saw only small chance discoveries.
From the beginning, the independent operator has borne
the brunt of exploratory
drilling-sharing the risks with
individual backers.
In 1894, however, drilling in
Corsicana and Beaumont caused
another boom; and by 1896, most
of the 1,450 barrels of oil produced
in the state that year came from
Corsicana. Production was great
enough to warrant a l,OOO-barrel
refinery, financed by eastern capital, that produced illuminating oil
and gasoline. This was the first
Texas refinery capable of large,
sustained operation.

Production of Texas crude grew steadily until the midfifties
but then slowed because of proration and declining reserves
1.5 BILLION BARRELS - - - - - - - - - - - - - - - -

1.0-

.5 -

o -"i~1::~-r--rl--r--r-;r--r-;r-'I;--r-;Ir1918

SOURCE:

1925

u.s.

8ul eau

1935

1945

1955

1965

1975

Mines

Since surpass ing Californi a and Oklahoma in the 1920's.
Te xas has bee n the l ead i ng producer o f c rud e
50 PERCENT OF U.S. PRODUCTION - - - - - - - - - - -

40 -

~~\

\.!!"~

,...........
'-

I. CALIFORNIA

,~ \

~~~#"

................ .............................
.~;~~'~~~~~,
"

10 -

OKLAHOMA

o -.,rl~:I~~::Ir--r-.Ir--r-,I~~~I~-r-.~
1918

1925

1935

1945

1955

1965

1975

SOURCE; U.S. Burllu of Mine.

Poor production practices of
financially pressed operators
brought enactment of conservation regulation, which required
the casing of producing wellB and
the plugging of abandoned ones.
Progress was also made in the
development of equipment, with
the rotary drill becoming increasingly common. And some of this
equipment was developed and produced in Texas; most had been
imported from Pennsylvania.

domestic production, and about a
third of it was shipped abroad.
Following Spindletop, oilmen
brought in additional large discoveries, including those in the
Electra, Ranger, Burkburnett, and
Yates fields. These giant fields
opened up new opportunities for
industry in a predominantly agricultural region. But they also
brought to the fore a number of
problems that required decades
to solve.

Giant fields
The Spindletop discovery in Beaumont just after the tum of the
century opened a new era for the
American petroleum industry. For
a brief period, this one field could
outproduce the rest of the world,
and Spindletop production turned
the coastal area near Beaumont
into a refining center. Port Arthur
handled tanker shipments to the
East Coast and abroad, and oil
came to be used for not only
lubrication and illumination but
also fuel oil and gasoline. American markets could not absorb aU
2

These giant fields opened up
new opportunities for Industry
in a predominantly agricultural region. But they also
brought to the fore a number
of problems that required
decades to solve.
Production from the same reservoir by many different operators
raised the legal problem of how
much oil was owned by each one.
Nobody was able to estimate the
total potential production from a

field and, hence, the amount of oil
to which each owner was entitled.
So, in 1889, the courts held that
the rule of capture applied. An
owner was entitled to as much
oil as he could bring to the surface.
As they strove to capture as
large a share of production as
possible, producers needlessly
spent money drilling extra wells.
And production at the fastest rates
possible wasted the natural drive
pressure of the fields. Because of
this pressure loss, the great gushers struck in the Spindletop field
and elsewhere were exhausted
rather quickly. Modem estimates
are that haH of the potentially
recoverable oil and most of the
associated natural gas were lost in
many instances.
Erratic production caused by
haphazard discoveries and then
rapid exhaustion resulted in
severe price fluctuations. Rapid
production from large discoveries
often glutted. the market, depressing prices. But then, as production
fell off between large discoveries,
prices would soar. The large discoveries and their rapid exhaustion
also brought boomtowos similar
to those that sprang up in the gold
rush and-with them-luxury,
crime, and squalor.
The short-lived oil booms caused
a number of bank failures in the
early twenties. Leasing of properties to drill put large amounts
of money in local hands, and the
influx of population brought booming business and inflated prices.
But in many cases, as soon as local
merchants geared up to handle the
higher volume of business, the
drilling stopped and the oil people
left nearly as abruptly as they had
come. With deposits declining
sharply. many banks failed.
Bank failures in oil towns were
important in contributing to the
demise of the state's Guaranty
Fund, which had been established
in 1910 to protect depositors
against bank failures. Because of

bank failures brought on by the
collapse of oil booms in Stephens
and Eastland counties. as well as
the recession of 1920-21. special
assessments were made on insured
banks. But the increased costs
generated demands by insured
banks to end the system. and the
law establishing the Guaranty
Fund was repealed in 1927.
Proration and conservation
As the age of illumination gave
way to the age of gasoline and
fuel oil. greater demands were
placed on refining. Between 1918
and 1938. Texas refining capacity
increased nearly fourfold and grew
from 16 percent to 20 percent
of the national total.
Innovations increased the yield
of desired products from crude oil.
For example. the thennal cracking process used heat to break up
large hydrocarbon molecules and
thereby increased the amount of
gasoline obtained from a barrel of
crude. The United States became
the world leader in refining technology. Its preeminence in refining
made this country an exporter of
oil products-particularly gasolineeven though it had become an
importer of crude.
By the end of the 1920's. however. refining capacity had significantly outpaced the demand for
refined products, placing the
industry in difficulty even before
the stock market crash and the
onset of the Great Depression.
And a combination of high imports
and large discoveries caused an
oversupply of crude oil also. The
new Yates field had many wells
with open-flow potentials of
100.000 barrels a day. In view
of the already glutted market,
the operators of the field agreed
to prorate production, placing
enforcement in the hands of the
Texas Railroad Commission.
Supplies were increased further
in 1930, when Dad Joiner drilled
into the East Texas field. The
Business Review I July 1976

Average price 01 Texas crude, stabilized by proration
for many years , surged during the energy crisis

e DOLLARS

PER BARREL - - - - - - - - - - - - - - ; - -

O~I--r--r-,--rl-,--~-,-,--r-Ilr_,__rl1915

1925

1935

1945

SOURCE: Texas Mld·Conline nt 011

1955

1965

1975

Oas Association

largest field ever found in the contiguous 48 states, it is estimated
to have contained 6 billion barrels
of oil. A swarm of producers
dumped a flood of oil on an already
depressed market. Over 100 mil-

lion barrels were produced the
first year. Oil prices in the field
fell from over $1 a barrel to 10
cents or less.
When conventional storage facilities filled uP. producers ran their

With growth in refining, Texas now processes
nearly as much oil as it produces
100 PERCENT OF PRODUCTION - - - - - - - - - - -,

90 -

80 -

TEXAS CRUDE OIL PROCESSED
BY TEXAS REFINERIES

60 -

if
1930

1945

1960

I
197 5

SOURCE: U.S. Bureau 01 Mines

oil into open ponds, where the
more volatile components evaporated, causing it to deteriorate.
And when earthen reservoirs
broke, streams were polluted, land
was ruined, and whole towns were
threatened with fire. In response
to wasteful practices and depressed
prices, the Railroad Commission
invoked a 1929 conservation law
and ordered production restricted
in the East Texas field.
In 1932, under the Market
Demand Act, the legislature
empowered the Railroad Commission to prorate production statewide, restricting it to amounts the
market could absorb. But the commission had difficulty in enforcing
proration, partly because of the
"hot" oil produced above proration allowances and shipped out
of state for sale. However, in 1935,
passage of the Connally Hot Oil
Act strengthened Texas conservation efforts by bringing federal
enforcement to bear on oil shipments out of state.
World War II
The state's proration laws helped
create a large oil reserve that was
of great value during World War
II. In spite of a falloff in wells
drilled from 1940 to 1943 because
of a shortage of equipment and
pipe, Texas accommodated nearly
80 percent of the wartime increase
in oil demand.
To move supplies more easily
and safely to the East Coast, the
Big Inch (a 24-inch pipeline) was
completed in 1943. This line transported 300,000 barrels of crude
a day. Later, the Little Inch
(a 20-inch line) was built from
Beaumont, Texas, to Linden,
New Jersey, mostly to handle
refined products.
Advances in refining technology
made during the 1930's had helped
spur construction of refineries in
the state. Catalytic cracking and
refonning increased the amount
of gasoline obtained from crude,

•

while alkylation and isomerization
improved its quality. Gasoline
became the specialty of Texas
refineries, while imports supplied
the less profitable heavy fuel oil
used for heating.
In spite of a falloff in wells
drilled from 1940 to 1943
because of a shortage of
equipment and pipe, Texas
accommodated nearly 80 percent of the wartim e increa se
in oil demand.

World War II placed huge
demands on the young petrochemical industry. For example,
natural rubber-suppJies of which
had been cut off by the Japanesewas replaced by synthetic rubber.
Much of the raw material for making synthetic rubber came from
refinery byproducts. With its
strong and growing refining base,
Texas attracted much of the new
plant development. Additional
growth in the areas of explosives,
fibers, and plastics helped boost

the output of U.S. petrochemical
producers a hundredfold by the
end of the war.

Oil banking
From the beginning, banks have
been reluctant to lend money for
oil exploration. But in the late
twenties, some banks began making production loans. Proration
made such loans more manageable
and, at the same time, increased
the need for them.
After 1935, revenues from production were used as collateral for
loans on a greater scale. Large
banks initiated specialized oil
departments staffed with technical
engineers to evaluate reserves in
the ground, and advances in geol~
ogy and petroleum engineering
allowed estimates to be made that
were reliable enough even for conservative bankers.
More common than production
loans were loans for purchasing
oil equipment. Loans secured by
mortgaging oil equipment were
similar to traditional bank loans
and, consequently, were easier to
evaluate and make. Also important

Aft e r p ea king i n th e 1950 's , c r u d e r ese r ves
i n T ell3s h ave cont in ued 10 decli ne

16 BILLION BARRE/L~S:,:==:::::=::::::::~==---8-

1945

1950

1955

SOURCE: Amer ic an Pelfoleum Insl;lule

1960

1965

1970

I
1975

Partly because of higher costs,
drilling activity trended downward after the midfifties
250 MILLION FEET DRILLED _ _ _ _ _ _ _ _ _ _ _ _ _ _ __

200-

150-

'00

TEXAS

1935

, ,
·

,, ,,

.... .. .

1940

1945

1950

· .. ..
1955

1960

1965

.
.

1970

1975

SOURCES: u.s. Bureau of Mines
World all

during World War II and after
were production payment transactions-associated with the transfer of oil properties from one party
to another.
With taxes taking half their
profits and producing companies
highly dependent on cash flow for
their operation, some of the small
and medium-size companies sold
all or part of their properties. At
the same time, larger companies
were usually more interested in
buying into production from existing properties to build their
reserve position. Modem engineering techniques made it possible for
banks to estimate future payouts
from fields and lend the money
needed to finance the purchase of
properties. The ABC deal that
became important after the war
facilitated transfers of these oil

properties and allowed producers
to benefit from the tax break
given to capital gains.'
Following World War II, oil
loans grew rapidly. At some large
Texas banks with oil departments,
such loans more than doubled by
the end of the 1940's. The growth
continued and, by the 1950's, oil
loans accounted for 40 percent of
total loans at large Texas banks
with aggressive oil departments.
After 1969, when Congress took
away the special tax advantages
of ABC deals, sales of properties
under these arrangements-and
the associated oil loans-largely
ceased. Nevertheless, with higher
oil prices in the past few years,
loans related to oil production
have boomed. Many large oil companies have raised money through
ofI-balance-sheet financing using

these loans. Since oil reserves are
not included on the balance sheet,
loans against reserves generally do
not reduce a company's ability to
make other loans on the strength
of its balance sheet.
Postwar growth
After World War II, conversion
from coal to oil and gas for industrial and residential uses proceeded
rapidly. Trains were converted to
diesel power, draft animals were
replaced by machines, and automobile production increased. By
1950, energy produced from petroleum exceeded energy produced
from coal. And natural gas, which
had been relatively valueless
before the war for lack of longdistance pipelines, found an outlet
to markets in the Northeast
through the Big and Little Inch
lines that had been converted to
handle it.

By 1950, energy produced
from petroleum exceeded
energy produced from coal.
The demand for oil and oil products began to exceed supply, and
in 1948, the nation became a net
importer. The imports brought
cuts in production allowables,
which, however, were temporarily
increased to help meet the surge
of energy requirements during the
Korean War. Texas became the
top producer of petrochemicals,
with the Houston area accounting
for a large part of the activity.
More than half of the nation's
synthetic rubber, plastic materials, and resins originated on the
Gulf Coast.

1. A simple example of an ABC deal would be where A sells his rights in a field to B but keeps the rights to revenue&production payments-dischargeable from 75 percent of the reserves. A then sells this 75 percent to C, which is usually a

small nonprofit organization. This sale is financed with a bank loan that is paid off out of production payments. The
result is A sells his property and enjoys a capital gains tax break-far milder than the income tall: he would otherwise
have to pay. B, the buyer, must operate the property, but the depletion allowance and operating expenses minimize
his taxes on the 25 percent of production he has bought. And C, the nonprofit organization, gets income with little risk.
e's income is the difference between the value of the production payments and the interest on the bank loan.
Business Review I July 1976

•

Exploration revived. Fifteen
new giant fields were discovered
by the midfifties, and the development of offshore drilling also
opened new frontiers.
But vast new discoveries had
been made in the Middle East and
North Africa, with production
costing only 10 to 20 cents a barrel. This oil held down the price
for U.S. producers and squeezed
drillers' profits.
Until the early 1970's, the average price of U.S. oil rose less than
the general price level. The cost
of drilling, however, rose faster
than prices over the same period.
Domestic drilling peaked in 1956
and declined most of the rest of
the decade and in the 1960's.
Drillers completed 21,500 wells in
1956 but only 9,200 in 1969.
After a voluntary program limiting U.S. oil imports had proved
ineffective, mandatory import controls were imposed by the Eisenhower Administration in 1959.
Under import controls, U.S.
refineries specialized even more
intensely in production of gasoline
and fuel oils-the more profitable

products-while the East Coast
imported heavy heating fuels at
bargain world prices. The Little
Inch was converted from natwal
gas back to refined products. And
the 1,600-mile, 36-inch Colonial
Pipeline was built to help move
gasoline and other products from
Texas to the Northeast.
Proration continued to create
substantial reserve capacity in
Texas fields, and the spare capacity helped the nation weather
Middle East crises in 1956 and
1967. At these times, easing of
proration restrictions let Texas
producers meet the nation's needs
and help relieve short supplies
in Europe as well. Eventually,
though, reserve capacity was drawn
down. Fields aged and, with drilling off, reserves were not replaced.
In 1972, the Texas Railroad
Commission lifted the max..imum
efficient rate of production to 100
percent, signaling the end of surplus reserve capacity.

The energy crisis
Texas oil production peaked in
1972. Some Gulf Coast refineries

Texas production allowable was cut back in the 1950's
as inexpensive foreign oll entered U.S. markets
110 PERCENT OF MAXIMUM EFFICIENT PRODUCTION - - - - -

100 -

................................................................................ ..

80
60
40
20 -

1940

r
1945

1950

SOURCE: Teus R.ilro.d Commi ss ion

•

1955

1960

1965

1970

1975

became dependent on foreign
crude, and the flow of a pipeline
from Corpus Christi to Big Spring
was reversed to bring foreign crude
to an inland Texas refinery. And
with growing demand and declining domestic production, the
nation's import requirements
climbed to 35 percent of consumption by 1973, leaving it vulnerable
to a cutoff of foreign supplies.
The October 1973 Middle East
War brought an effective oil
embargo with sizable foreign production cutbacks. Between September and November, Arab
nations slashed their production
23 percent-resulting in a reduction of 8 percent in world oil production. Because of the volume of
supplies in transit, the full impact
of the embargo did not hit the
United States until 1974. But the
shortage of oil and the associated
sharp price increases then exacerbated the difficulties of a coincidence of inflation and recession
already troubling the economy.
The energy crisis hurt some
segments of the Texas economy
but gave others a lift. Spurred by
higher oil prices, drilling boomed
and has been limited, at times,
only by the number of rigs available. The number of rotary rigs
operating in Texas is now the
highest in over ten years, and
drilling is being carried on over
a wide area. In 1974, wells were
sunk in 212 of the 254 Texas
counties. Manufacturers of oil field
equipment have enjoyed a swge
in both local and worldwide
demand. And oil-related loans at
banks nearly doubled from 1970
to the beginning of 1976.
Although Texas oil production
has been declining since 1972, the
resulting loss of revenue to the
state and its citizens has been
more than offset by advances in
oil prices. Prices spiraled from an
average of $4 a barrel in 1973 to
$7 a barrel in 1974. But even with
the decline in output, the value

Of course, much of Texas industry has not benefited from higher
crude and gas prices. Texas has
tended to attract industries that
use large amounts of energy-such
as refining, petrochemicals, metals,
and metal fabricators. With only
about 5 percent of the nation's
population, Texas uses some 10
percent of the nation's energy.
The embargo and higher energy
prices have hurt these energy·
intensive industries.

also continue to grow. AB equipment makers in other states once
supplied Tezas needs, Tens now
supplies much of the needs of the
world. At least 40 percent of the
oil field equipment produced in
the state is now exported.
Texas oil banking also has a
bright future. Several large oil
companies have recently moved
their headquarters to Texasexpanding opportunities for Tens
bankers. Moreover, Tens banks,
with their recognized expertise
and long experience in oil finance
and their large competent staffs,
are in a favored position for
making international oil loans.
For example, Tezas banks have
already shared in the financing
of oil field equipment needed
for exploration in the North
Sea. TeJ:8.S is becoming a world
center for energy technology and
know.how, and with this goes an
excellent potential for continued
growth in oil banking.

Future prospects

-Stephen L. Gardner

of production climbed from about
$4.5 billion in 1973 to $8.8 billion
in 1974. And taxes on the petro·
leum industry, which account for
some 20 percent of the state's rev·
enue, rose proportionately.

The energy crisis hurt some
segments of the Texas
economy but gave others
a lift.

Tens oil production is now declin·
ing, although drilling activity has
been boosted to record levels by
higher prices. But even if the
trend in production is not turned
around by current ezploration,
many of the industries once
spurred by Tezas oil production
will continue to expand.
The refining and petrochemical
industries, for example, should
continue to be a mainstay of the
state's economy even if they
become increasingly dependent on
imported oil. Petrochemicals com·
prise the state's largest industry
in tenus of value added, while
refining is largest in tenns of total
sales. And Government policies
that favor imports of crude rather
than refined products are likely
to continue.
The manufacture of oil field
equipment. which now accounts
for most of the nonelectrical equipment produced in the state, should
Business Review I Ju1y 1976

Industrial Production-

New Louisiana Index Dominated by Mining
To help carry out its function of
monitoring economic activity
in the Southwest, the Federal
Reserve Bank of Dallas has con·
structed an industrial production
index for Louisiana. Modeled
after the Texas industrial pro·
duction index, the new index is
designed to show changes in output each month for Louisiana's
factories, mines, and utilities.
The index measures broad
changes in Louisiana's industrial
performance. And because the
index is calculated by using data
that are independent of variations
in prices, the changes are unaffected by inflation.

As a coincident indicator of
the business cycle, the index
moves with fluctuations in
general business cond itions

in Louisiana.

As a coincident indicator of the
business cycle, the index moves
with fluctuations in general business conditions in Louisiana.
Moreover, since the same indus·
tries are covered in the Texas
industrial production index pre·
pared by this Bank and in the U.S.
index prepared by the Board of
Governors of the Federal Reserve
System, the Louisiana index facil·
itates comparisons of economic
activity between the two states
and with the nation as a whole. 1
Index performance
As depicted by the index, indus·
trial production in Louisiana has
followed a significantly different
path from that in Texas and in the
nation. The major reason for the

difference is the contribution to
total output by the three major
components-manufacturing, min·
ing, and public utilities.
Industrial production in Louisi.
ana is dominated by mining. In
fact, mining accounts for more
than half of the total, compared
with only 29 percent for Texas
and 6 percent for the nation.
Crude oil production accounts
for two·thirds of total mining in
Louisiana, while natural gas makes
up 20 percent. Another important
mining activity in the index is
drilling, which accounts for 11 per·
cent of the total.
Output in the mining sector fell
steadily between October 1970
and January 1976, with the index
moving from a high of 129.0 per·
cent of its 1967 base to a low of
88.6. Unlike Texas, where discov·
eries of giant oil fields added sub·
stantially to proved reserves,
Louisiana has not had significant
increases in reserves from which
to draw production.
The decline in mining kept the
total index from growing through
the onset of recession in late 1973.
And as manufacturing output has
shown little growth over the past
three years, the continued steep
decline in mining accounts for most

of the large drop in the total index
since then.
Manufacturing output in Louiai·
ana tends to follow a cyclical pat·
tern that is relatively resistant to
declines. During the 1969·70
recession, for example, such output only leveled off-instead of
declining, as in Texas and the
nation. And while output in Lou·
isiana decreased somewhat in the
1973-75 recession, sharper declines
were experienced in Texas and
the nation.
The resistance to cyclical setbacks is largely due to the relatively small weight of durable
goods in the Louisiana manufacturing index. At 30 percent, the
weight for these cyclically sensitive
manufactures is well below the 44
percent for Texas and almost 60
percent for the nation.
Less sensitive nondurable goods
production is more than twice as
important as durable goods production in the Louisiana manufacturing index. The major reason
is the size of the refining and
chemical industries that developed
with the state's mining industry.
The chemical industry is the
biggest manufacturing industry in
the state, accounting for better
than 13 percent of total industrial

Methodology of Index
A technical discussion of the methodology used to construct the Louisiana industrial production index, as well
as historical data beginning with January 1967, is available free on request to the Research Department, Federal Reserve Bank of Dallas, Station K, Dallas, Texas
75222.

1. The methodologies of the Louisiana index and the U.S. index differ. but comparisons of broad movements by the two

indexes can be made without a significant loss in reliability.

Industrial production i n Louisiana does not follow the national business cycle .. .

140 (1967=100)---------------------------------------------------------(SEASONALL y

130 - -

TOTAL PRODUCTION
LOUISIANA INDEX

TEXAS INDEX

/ :.:..-:.:" .....:/...\.....
;. -t
... .... --, ....

\ \ t···

F"'' ' ' ;>:

120 - -

....

.....

/'................~......'.:

~:,/-',
~.
\
.,'J':
......... _,

110 - -

f"/"
.

\ .......

,/,

\,-

;?'~

ADJUSTED~

", /'

U.S . INDEX

'I
100

1967
SOURCES;

1968

1969

1970

1971

1972

1973

1974

1975

1976

BOilrd of Governor s, Federal Reserve System
Federal Reserve Bank 01 Dallas

output. The refining industry that
feeds it ranks third in importance.
The second-ranking nondurable
goods industry is food and kindred
products. The food processing
industry accounts for nearly 6 percent of total output and is the
state's largest source of manufacturing employment.
Another important nondurable
goods industry is paper, which is
dependent on the lumber industry
for most of its input. Together, the
paper and lumber industries contribute more to total output than
does the food processing industry.

. because mining dominates in the state .

70PERCENT-------------------------------------------COMPONENTS OF INDUSTRIAL PRODUCTION IN 1972
60 --

50 --

UNITED STATES
TeXAS

Methodology and data
The methodology used to construct the Louisiana industrial
production index is the same as
that for the Texas industrial production index. The dimension the
index seeks to estimate is value
added, which is uniquely related,
by means of a production funcBwiness Review I July 1976

SOURCES; Board of Governors, Federal Reserve System
Feder..' Reserve Bank of Dallas

•

and has fallen steeply as crude oil reserves dwindle ...
130 (1967=100) __________________________________________________________
(SEASONALLY ADJUSTED)

LOUISIANA INDEX

120 -

110 - -

100

...
90 - -

MINING OUTPUT

80
1967

1968

1969

1970

1971

1972

1974

1973

1976

1975

SOURCES: Boa.d of Governors. Federal Reae.ve System
Federal Rese rve Bank 01 Dallas

and because manufacturing in louisiana is relatively resistant to cyclical declines

140 (1967=100) - - - - - - - - - - - - - - - - - - - - - - - - - - - - - (SEASONALLY ADJUSTED)

TEXAS INDEX

130 -

MANUFACTURING OUTPUT

,.: / "'-"',

. /

...\ i'

... ft

120 -

........ I

:'
.............~. t" .j'...

,, ' /

I
I

110 -

1967

1968

1969

1970

1971

SOURCES: Soard 01 Governors, Fed eral Reserve Syst,m
Federal Re se rve Bank 01 O'llas

1972

197 3

1974

1975

1976

tion, to the amount of capital and
labor employed. Therefore, when
direct output data are not available, value added can be estimated
from the amount of capital and
labor inputs.

The dimension the Index
seeks to estimate is value
added, which is uniquely
related, by means of a production function, to the
amount of capital and labor
employed.
Some of the required data, such
as output for mining and petroleum
refining, are available directly.
These data, which constitute
almost two-thirds of the total

index, are reported by the U.S.
Bureau of Mines and the American
Petroleum Institute.
For most industries, however,
output data are estimated. Industrial use of electric power, measured in kilowatt-hours, is used as
a proxy for capital inputs. Multiplying total employment by average weekly hours worked generates
labor inputs. The electric power
series is produced by the Federal
Reserve System, while the employment data are provided by the
Louisiana Department of Employment Security.
Where direct output data are
not available, total value added is
estimated by using a production
function of the Cobb-Douglas
form. This function allows for
variability in the ratio of capital

to labor and is more accurate than
functions that do not have this
8exibility.
Once output is obtained for each
industry, weighta are assigned
according to the contributions of
the industries to total value added
in the state. The 1972 Census of
Manufactures and the 1972 Census of Mineral Industries provided
the benchmark data for weighting
each industry.
-Brian P. Sullivan
Edward L. McClelland

New member bank
First City Bank-Northeast, National Association, Houston, Texas, a newly
organized institution located in the territory served by the Houston Branch of
the Federal Reserve Bank of Dallas, opened for business June 9, 1976, as a
member of the Federal Reserve System. The new member bank opened with
capital of $500,000, surplus of $500,000, and undivided profits of $250,000. The
officers are: Cayce W. Moore, Jr., President and Chief Executive Officer, and
Don Roberts, Cashier.

New par bank
Union Bank & Trust of Dallas, DaUas, Texas, a newly organized insured
nonmember bank located in the territory served by the Head Office of the
Federal Reserve Bank of Dallas, opened for business June 15, 1976, remitting at
par. The officers are: David M. Bernardin, President; Jerry C. Lackey, Senior
Vice President; and Jimmie C. James, Cashier.

Bwlneas Review I July 1976

Federal Reserve Bank of Dallas

July 1976

Eleventh District Business Highlights
BUSINESS LOANS
Loans to businesses at weekly

reporting banks in the Eleventh
District rebounded in May. With
the exception of a large increase last
December, the May advance was
the largest month-ta-month gain in
more than a year. Business loan
demand has been sluggish during
much of the economic recovery, as
rising profits and depreciation
reserves have provided a flow of
funds from internal sources and a
hesitancy to build inventories has
kept business needs for credit at a
fairly low level.
Money market interest rates rose
sharply in May. And a narrowing in
the spread between the rate on
prime business loans and the rate
on prime commercial paper led
some businesses to return to banks
for their financing needs.
Loans to producers of nondurable
goods increased rapidly, while loans
to other types of businesses grew
moderately. Demand from producers of nondurables was heaviest
from manufacturers of food, liquor,
and tobacco. These concerns, after
making larger than usual net repayments since January, increased
their bank borrowing more than 10
percent in May. And the May
increase is even more striking when
compared with an average repayment rate of 4 percent in May of
the previous six years.
Other major nondurable goods
producers also increased their borrowing in May. And again, in each
major category, net borrowing was
higher than the average for the six
previous Mays.
Loans to manufacturers of chemicals and rubber rose for the second
consecutive month as production
by these firms continued at a rate
nearly 17 percent higher than the

recession low last year. Loans to
producers of textiles, apparel, and
leather also rose moderately, as did
loans to petroleum refiners.
Though loans to manufacturers
of transportation equipment rose
moderately, loans to most other
durable goods producers remained
steady. Moderation in loan demand
from most durable goods manufacturers is typical at this time of year,
however.
Loans to the construction industry rose fractionally in May-the
first month of increase in 1976.
Loans outstanding to construction
industries in April had been at the
lowest level since May 1972, indicating general slackness in construction activity. Construction of
single-family residential units
appears to be gaining momentum in
the District, but most other types
of residential and nonresidential
construction remain sluggish.
Largely because of demands from
retailers, loans to the wholesale and

BUSINESS LOANS
3 PERCENT CHANGE - - - - FROM PRECEDING MONTH

1i70-75
AVERAGE

..........
.....
.
,.,.'

.'.'

0-=-,\,--

-.-2-rr~,-r-,~rl~.~~Ac;r~.~r--

retail sector rose slightly in May,
following small declines in March
and April. Precise inventory data
are not available, but District
department store sales moderated
in April and May and retail trade
firms may have sought bank funds
to finance growing inventories.
YATES UNITIZATION

After extensive hearings and an
extended campaign by Marathon
Oil Company to enlist as many
royalty and drilling interests as possible, the Texas Railroad Commission authorized unit operation of
the Yates field in West Texas on the
first of July.
Previously, the many owners had
operated independently. But under
unitization. a single operator will
design pressure maintenance and
secondary recovery operations for
the entire field, thereby boosting
remaining ultimate recovery.
The Yates field is the largest field
in the contiguous 48 states in terms
of recoverable reserves. And unitization will add some 200 million
barrels to the field's output. This
will enable the Railroad Commission to double authorized production to 100,000 barrels a day without damaging the field.
For optimum efficiency in recovery, unit operation is a must-particularly for large fields, such as
Yates, where careful engineering
can significantly boost ultimate
recovery. Most states have mandatory unitization laws, but in Texas,
unitization is voluntary. While
some owners may choose to stay
out of the unit, it is to the advantage of the operator to sign as many
interests as possible.
More than 98 percent of the drilling interests in Yates have joined
(Continued on back page)

INDUSTRIAL PRODUCTION
(SEASONALLY ADJUSTED)

TOTAL PRODUCTION -

-MINING-

MANUFACTURING-

140 (1967=100) - - - - - - --

140 ( 1 9 6 7 = 1 0 0 ) - - - - - - - -

130 -

130

120

-V. . . ..

120 (1967:::100) - - - - - - - -

120

·..··i
.'~'

V···· ....../ \

110 -

LOUISIANA \.

.•.

100 -r~~-,~~~~~=-1r

1974

1975

1976

100

SOURCES: Boa,d ot Gova rnora, Fe deral Rese rye
Fad e.al Res e, ve Dank o t Dall as

1974

EMPLOYMENT AND UNEMPLOYMENT

UNEMPLOYMENT RATE
... ( RIGHT SCALE )

t./ \..........\

240

"','- -

210
7

8.7-

-6

8.6-

-5

8 .5 -

'CROPS
\

180
150

, .........,--.... -,

1975

1974

-4

(LEFT SCALE)

,-=;:;--,----:=,--,--=;-;--r
3
1974
1975
1976

1. ArI:r.ona, Lo ui.lan a. New Mex ico, Oklah oma , and Texa s
SOURCE: State employme nt a gencies

SAVINGS AND LOAN ASSOCIATION ACTIVITY
AND HOME BUILDING IN TEXAS
(SEASONALLY AOJUSTED, DY FRD)

PERCENT 100

900 MILLION DOLLARS
WITHDR AWALS-TO, \ ......... \ SAVINGS RATIO
,
J..
\ .. (RIGHT SCALE) "

800-

CONSUMER PRICES

700 _

170

. . . . . . . . . ..

HOUSTON ... ...

//:.=~.:

......

U.S,

/.-::~..... DALLAS

140
130

,---;;;:;:;--,-----:=;-,-=:;-:;--,1974
1975
1976

SOURCE: US. Bureau ot Labo, Slsllstlcs

600-'

180 ( 1 9 6 7 = 1 0 0 ) - - - - - - - - - - - - - -

150

1978

SOURCE: U.S. Oe pertm ant ot Ag riculture

8 ,4 -

160

1976

LIVESTOCK AND
LIVESTOCK PRODUCTS

120

8.3

1975

PRICES RECEIVED BY TEXAS FARMERS

PERCENT 8

8 .8 -

1974

1976

270 ( 1 9 6 7 = 1 0 0 ) - - - - - - - - - - - - -

9.0 MILLION
.......

1975

S~ ste m

FIVf SOUTHWESTERN STATES'
(SEASONALLY ADJ USTED. BY FRD)

8 ,9 -

80_r~~_r~~_r~~_r

-r-c~c-r-~~'-~~-'-

"',

,I ,

500-

~, ,-

50
300-r1--c,9~7~4c--r--,~9~7~.c--r--'~9~7~6c--;r 40
400 -

SAVINGS (LEFT SCALE)

10,0 THOUSAN D - - - - - - - - - - - -

~·l ~1111111I;;;;;,~I~iii IIIIIII1
I

1974

1975

1976

SOURCES: Du reau of Du. ln... R..... c h, Unlve.slty of Tex . .
Federel Home Loan Bank of Little Rock

CONDITION STATISTICS OF ALL MEMBER BANKS

RESERVE POSITION OF MEMBER BANKS

ElEVENTH FEDERAL RESf:RVE DISTRICT
(CUMULATIVE CHANGES)

ELEVENTH F£DERAl RESERVE DISTRICT
(MONTHLY AVERAGES OF WEEKLY DATAl

2.0 BILlION·DOLLAR C H A N G E - - - - - - - -

250 MILLION DOLLARS - - - - - - - - - - -

1.5 -

200 -

LOANS

_«./ ;/ :

1.0 -

•..•.....••...•.•......
.·' 1976
....

19 74....... .

_,,-----"

. ...... ......•....• "
...............
.. ,
~
::/
1975
~ - -i

- - - - - -197~_.

INVESTMENTS

1.5 -

_- - - - -

'~ ~:.~~~~~~~ ~.~.7.~

A .:

:: ,JV\.f\ i\:~~~;:

::sr

~ \"~ *iq

2.5 BILLION·DOLLAR CHANGE 2.0 -

BORROWINGS
FROM FRB

- 50-100-

-150 -,--:::::-:----,,---;;::;;--r---::=-..,
1974

1975

1976

. ....

O~iililll

2.5 BILUON·DOLLAR CHANGE - - - - - - - 2.01.5 _

1.0

-.<C
'--. .-.
TIME DEPOSITS

~."

.5-

..,.~

................

.:.t ~ _ _ _ _ -

....:.:

.~-

_-_......

.~~.!.~.....;;:;:~
1975

LOANS AT WEEKLY REPORTING BANKS
ELEVENTH F£OERAl AESERVE DISTRICT
(CUMULATIVE CHANGES)

800 MILlIQN·OOUAR CHANGE - - - - - - - -

,:~:'NESS L~

1976
O--~~~-,-,-,~~r-r-r-~T-

400 _
2.0 BILLlON·DOLLAR CHANGE - - - - - - - - 1.5 1.0 _

. 5 - .........
~

...

1976
I

I
F

I
M

I
A

I
M

I
J

I
A

~.. , ... _---- ... __ a

... ...

50-

o
Iii
SON

100 MILLION·DOLLAR CHANGE - - - - - - - -

.~.g:;.;.

..........

'.~;.:::,~·

-200 ---'~-==-r-C--r-r--r-r--r-r--r-,--r-,--

197~_'

............................
. . . . . .. ..
~ ..

- .5 -1.0

"
,,'

DEMAND DEPOSITS

...: : ........... ....... l...

i
D

.......•..

1976
~_~ .:'.. .....

CONSUMER
LOANS

-50 -

' ,- - ____

..····'·1·974·.. ··· ......

-------«.-75

-100---r0::~OCC~0-TO-TO-TO-TO-TO-!0-TO-TO-TO-
J
F M A M J J
A SON D

CONSTRUCTION CONTRACTS
FIVE SOUTHWESTERN STATESt
(SEASONAllY ADJUSTED. BY FR8)

FOREIGN TRADE

2 .0 BllUON DOLLARS - - - - - - - - - - _

HOUSTON CUSTOMS A£GION
( SEASONAllY ADJUSTED. BY FRB)

1.6 -

1.4 BIUION D O L L A R S - - - - - - - - - - TOTAL

1.2 1.2 -

1.0 -

I '~

•

.8-

,......

.8NONRESIDENTIAL

.6 -

r'
,,

~~I
~

, \

'/',

I I

..... , I \~

\ I

IMPORTS "

.4-'
o
1. Ari zo na, louisi ana. Naw MexiCo. Okl. homa, and Tu ..
SOURCE: F. W. Dodge. McGr.w·Hill, Inc.

-,-=;--.,.---,,=-,.--;:,;:;---,-1974
1975
1V76

SOURCE: U.S. Otopartmenl of Com_rce

the unit operation. But because
unitization has taken several years
to arrange, increased production
from the Yates will not be as profitable as it might have been.
EMPLOYMENT

Labor markets in the states of the
Eleventh District are weakening.
Total employment, seasonally
adjusted, dropped for the third
consecutive month in May. The
rate of growth in the civilian labor
force leveled off, and the unemployment rate rose to 6.9 percent.
Some of the weakness in the May
statistics reflects a slower rate of
growth in employment than is normal for that month. But evidence
also suggests the labor markets
may have begun a broad downturn
as early as February. Over the
four-month period, total nonagricultural employment declined by
more than 42,000.
Half of the loss in jobs was in
construction. The industry, hard
hit by recession, had been making
fairly steady re<::overy until building
activity, as measured by the total
value of construction contracts,
peaked in February.
Another quarter of the decline in
employment was in trade, while
smaller losses were registered in
such other nonmanufacturing
industries as services, finance, and
transportation and public utilities.
The only gains in nonmanufacturing employment were in government and mining.
Manufacturing employment
dropped sharply in the durable
goods industries. The total number
of workers in nondurable goods
industries, however, was slightly
above the February leveL

OTHER HIGHLIGHTS:

• Preliminary estimates show the
Texas industrial production index
rose at a 7.2-percent annual rate in
May. A sharp increase in mining
output more than otTset the second
consecutive decline in manufacturing output to account for the
overall gain.
The decline in durable goods
manufacturing was centered in primary metals, lumber and wood
products, and furniture and fixtures. Gains, however, were posted
in transportation equipment, nonelectrical machinery, and fabricated metal products. The biggest
declines in nondurable goods industries were in refining and printing
and publishing.
During the first five months of
the year, industrial production fluctuated within a narrow range.
Manufacturing output was 1 index
point ahead of the December level.
while both mining and utilities were
down 2 index points.
• Weekly reporting banks in the
Eleventh District reduced their
record holdings of Government
securities slightly in May, snapping
a skein of 18 month-to-month
increases. Since October 1974, holdings of Government securities had
risen 140 percent, and the ratio of
these holdings to total credit had
more than doubled.
The reduction in holdings of Government securities in May reflected
a slightly lower volume of new otTerings of these securities and a move
by the Treasury to lengthen the
maturity of its debt. A relatively
strong cash position enabled the
Treasury to limit its otTerings to less
than $4 billion in May.
In recent months, the Treasury
has shifted the emphasis in its
operations, lengthening the maturity structure of the public debt by
repaying a portion of the maturing
Treasury bills while raising new
capital through longer-term notes
and bonds. As a result, the total

outstanding volume of3-month and
6*month Treasury bills fell about $2
billion in April and May while new
offerings of notes and bonds rose.
In May, the Treasury issued its
first lO-year note under new legislation that doubled the maximum
maturity for notes from 5 years to
10 years.
Portfolios of large banks reflect
the change in maturity structure.
Holdings of U.S. Treasury notes
and bonds at those banks continued
to rise in May, but holdings of Treasury bills fell more than 13 percent.
• Cash receipts from farm and
ranch marketings have been
boosted by increased sales of livestock and livestock products. In the
first four months of the year,
receipt<:; from animal products were
well above 1975 levels. Crop sales,
however, were lower.
In the states of the Eleventh District. total receipts from marketings
through April increased 9 percent
over the same period last year.
Sales from livestock products were
up over a third, but crop receipts
were down about a fifth. Total farm
and ranch receipts for the United
States increased a tenth in the first
four months of this year.
• The pig crop in Texas during the
six months from December 1975 to
May 1976 was up a fifth over a year
earlier. For the nation as a whole,
the pig crop increased 14 percent. A
larger breeding herd. together with
bigger litters, boosted. the number
of pigs raised.
Pork production is expected to
continue increasing into 1977.
Because of favorable feeding margins, hog producers intend to
increase the size of breeding herds
during June through November,
and gains in the number of hogs will
be evident in a pickup in slaughter
by late summer. Texas producers
expe<:t to expand the number of
sows about 20 percent, slightly
above the 17-percent rise for other
producers.

Full text of Review (Federal Reserve Bank of Dallas) : July 1976

FRASER