On the southern edge of Amarillo, Texas, on an access road beside a highway, sandwiched between D&B Equipment and Pools by Tenorio, stands a building called the Oil Center, which is home to eleven independent oilmen. The Oil Center is set back behind a parking lot full of potholes, the entrance to which is guarded by two Versailles-style lanterns, both broken. The building itself is one story high and, aside from a glass door, windowless. Its roof and walls are made of aluminum siding; a decorative brick facade in front is missing quite a few of its bricks.
In a tiny office in the Oil Center, a single room jammed with maps, photographs, geological logs, country-music tape cassettes, vitamin pills, and books, works Jack G. Jones, self-employed petroleum geologist. Jones is a leathery, friendly, voluble man of 47 who wears polyester suits, cowboy boots, and wraparound sunglasses and drives a midnight blue Lincoln Continental. He makes a generous living by drilling for natural gas— guessing where it might be found, acquiring the right to drill for it, amassing the money necessary to operate a rig, and then, if he finds gas, selling it to a pipeline company.
If you’re a liberal like me, a Texas oilman like Jack Jones is one of the most potent symbols of what’s wrong with America. Before actually encountering any of them, I had a pretty firm idea of what a Texas oilman was like. Swaggering, boastful, greedy, by day he raped the landscape in search of slimy crude, by night returned to his mansion, swimming pool, and Cadillac, to revel (in the company of his mink-coated wife, or perhaps a flossy showgirl) in the abundant fruits of his meager labors. Perhaps at dinnertime, while tearing into a thick slab of beef, he’d complain about bureaucrats and welfare cheaters, interrupting himself to order his trembling servants to bring him another Scotch. For culture, the arts, reading, anyone’s problems but his own, he cared not at all. Money was his only goal, and he had accumulated it not through intelligence or hard work, but pure dumb luck. I would have agreed fervently with Irving Howe, when he said, in a recent issue of The New Republic, “My strong impression is that most of the people who have done the most to make our life better—from Jonas Salk to George Balanchine, from Walter Reuther to Arthur Schnabel—have been content with relatively modest material rewards.” I would have nodded approvingly when Howe quoted Marx on the repulsiveness of rich men and added, “This speaks to a visible reality, the reality of J. Paul Getty, Howard Hughes, H.L. Hunt, and a thousand others.” It’s no accident that none of Howe’s exemplars of virtue were in business or that his three anti-heroes all got rich through oil.
If, on the other hand, you’re a conservative, you probably regard people like Jack G. Jones as a dying breed—a mix of appealing self-reliance and unappealing unsophistication, but certainly unimportant economically in this age of the large corporation. In the oil business, especially, you might think, this is a time when the advantages of the corporation are most readily apparent because oil is desperately needed but very expensive to find, in terms both of drilling costs and of expertise. It takes, you would think, huge companies with huge capital reserves and substantial borrowing power, and generous incentives from the government, to keep America running.
So as the war continues to rage between liberals and conservatives, one of the rare points of agreement is the writing-off of the entrepreneur. In recent writings, both Irving Howe and Irving Kristol have pronounced him dead as a significant factor in American economic life—”a handy myth for conservative ideologues,” Howe called him. The liberals preach expansion of the welfare state and controls on business; the conservatives preach economic growth through an unfettered private enterprise system; but the forum for each side’s plans for America is the large bureaucratic organization, either the federal government or the big corporations, depending on your persuasion.
This seems reasonable in the case of the oil business until you take a closer look at the role the independents play. In 1972 the major oil companies found 38 new domestic oil fields; the independents, 317. In natural gas, the majors found 127 new fields; the independents, 285. The majors had 562 exploratory successes in all that year; the independents, 1,485. The independents account for about 30 per cent of the oil industry’s expenditures, drill 88 per cent of the wells, and have a 47.3 per cent success rate in exploratory drilling, as opposed to the majors’ 30.8 per cent. Of course, the majors’ oil finds—the North Slopes and Baltimore canyons—are generally much larger than the independents’, but even so the independents drill about half the oil and gas in America. The independents are in fact probably more important to our domestic oil production than these figures indicate, because often a major company will buy up a field and produce from it after an independent finds it.
An independent oil company, by the standard definition, is one involved only in the exploration and production end of the business, as opposed to the large integrated companies that refine and sell oil as well as finding it. Some of the independents are large companies, but most are small operations with one or two principals. They’re also far more risk-prone than the majors. In 1957 there were about 20,000 independents in the country; in 1973, following a period when foreign oil was cheap and readily available, there were only 10,000. People like Jack G. Jones, far from being dwarfed by the big corporations in their business, are the ones who find most of the oil and gas in this country, despite having far smaller resources at their disposal. So the questions of how they do it and why they’re so successful are important. What makes the independents go might be, if writ large, what could make America go too.
Drilling on a Hunch
All of the reasons for the independents’ success are object lessons in what entrepreneurs can do better than large corporations. Though the majors have more money, the sheer numbers of the independents greatly increase the odds of their finding new oil. While the majors do many things, the independents can concentrate on one—they plow back 95 per cent of their revenues into the oilfields, as against 56 per cent for the majors. The majors have tremendous overhead costs that prohibit their drilling smaller wells to find smaller fields; the independents can operate much more cheaply and can therefore profitably drill a million-barrel field on which a major would lose money. A less quantifiable but nonetheless important reason for the success of the independents is that they’re less bureaucratic than the majors. An independent oilman is by definition someone who doesn’t mind taking a gamble and can drill on a hunch if he so desires; at the majors, exploratory efforts have to go through the usual channels to be approved. As is true in life generally, the former approach can often produce results that the latter doesn’t.
The majors and the independents have a curiously symbiotic relationship. The typical independent got his start working for a major company, getting a free education in finding and drilling oil, and left in mid-career because he wanted to be in business for himself. But most of the oil the independents find eventually makes its way (via a series of middlemen) into the hands of the majors. In effect, the majors figure the extra cost of buying this oil instead of drilling it themselves is offset by the risk the independents assume. And if an independent should stumble onto a major field, the majors can always buy him out or buy the surrounding land. The role of the independents in the oil business is similar to that of the old, pre-farm-club minor leagues in baseball, Off-Off-Broadway in the theater, or state legislatures in national politics—they produce many of the discoveries that keep the large, dominant institutions strong.
‘I’ve Done Everything’
Jack G. Jones was born in Warsaw, North Carolina, the son of a tobacco farmer who was killed in a car accident when his son was seven years old. He went to high school in Nashville, Georgia, worked as a newspaper boy, a drugstore clerk, a night watchman, a shoe salesman, a factory worker, and a tobacco harvester, and then joined the Navy. Once he was hitchhiking home from his base and was picked up by an old oil wildcatter from Homer, Louisiana, named Franklin B. King. King, Jones says, looked like a thin Colonel Sanders.
King asked Jones if he was planning on making the Navy a career, and Jones said no, he wasn’t. “Well then,” King said, “why don’t you become a geologist. That’s one of the last frontiers where you can start out poor and become wealthy.” King told Jones that if he studied geology at either the Colorado School of Mines or the University of Oklahoma, and if he made straight As, there would be a job waiting for him when he got out. Jones chose Oklahoma and did indeed make straight As; when he got his master’s degree in 1957 he had eight job offers. On the advice of a trusted professor, he chose Humble Oil, then an independently operated subsidiary of Standard Oil of New Jersey, now a part of Exxon. After a year with the company Jones was placed in its Amarillo office, doing geological mapping and field work in the Texas Panhandle. In 1962 the company put him under a supervisor he didn’t get along with, and as a result he got mediocre evaluation reports and his career stagnated. In 1965 the company was centralizing, and it decided to close down the Amarillo office. Jones was told that if he accepted an assignment in Libya for two or three years and did well there, he could come back to the States with a clean slate. Jones chose to quit.
He first went into business as a beer distributor but failed after six months. Then he went to work for Amarillo Oil, a large independent, for four years, leaving when the company got a new president he didn’t like. That was when he became an independent oilman. He had an office he’d built in his backyard and $700 in the bank. I asked Jones whether it had been frightening going into business for himself at 40, having been on a salary for most of his working life, having failed to set the world on fire at Exxon, and having gone broke in his previous attempt at self-employment. “No, I wasn’t,” he said. “I’ve done everything. There’s not much I can’t do. I fly my own plane. I drive my own trucks. I can operate heavy machinery. There’s damn little I can’t do.”
For most of us, the money in our lives is measured in salary; for an independent oilman, it’s measured in equity. When most of us make an investment, it’s for a house or a car or stocks or bonds; when an independent oilman does, it’s for his livelihood. The income tax laws are written with the salaried in mind and make few adjustments for the wild income fluctuations and different nature of investments in an entrepreneur’s life. Tax breaks for investment, for most of us, can be an incentive to play the market; for Jack Jones they determine whether or not he can drill. An independent oilman’s primary objectives in steering a well through the labyrinth of funding is to raise venture capital and to hang on to as large a percentage of the ownership as possible, a financial problem most of us never run across.
If the independent is a geologist like Jones, he’ll start by poring over maps and past drilling records until he comes upon a place where he thinks there’s oil or gas to be found. He may do seismic testing on the land to lessen the odds against him. Then he has to acquire the right to drill. If the land is privately owned, he has to talk the owner into selling him an oil lease. If it’s already under lease to someone who’s not drilling it, he can arrange to sublet it (this is called a farm-out). Often little or no cash changes hands in these transactions. The lessor gets an eighth or a sixteenth or a thirty-second of the well instead.
Now the oilman has to get the money to drill, which in Jones’ case usually amounts to about $300,000. Except in the rarest of circumstances, banks won’t lend money for exploratory drilling—it’s too risky. So an independent who doesn’t have capital of his own—as Jones didn’t when he was starting out—has to raise the money from private investors, in exchange for a piece of the action. Like the independent himself, these are people who like to take chances with their money. They might be local businessmen or doctors, friends or relatives, professional oil investors, or a “fund company,” which finances wells and then sells its investments to other investors.
With the money, the independent will hire a drilling contractor to drill in a particular spot, to a specified depth, and to encase the hole in a concrete pipe. Then the driller leaves and another contractor, an electric logger, comes in. The logger sends an instrument down the hole and produces a series of logs—endless thin strips of paper with squiggly lines running down them that represent the porosity, electromagnetivity, and other properties of the rock surrounding the hole. By studying these, a geologist can make a good guess as to where along the concrete pipe there might be oil or gas. He then brings in another contractor, who lowers explosives to precise depths in the pipe and blows holes in it. If there’s oil or gas there, it will seep up the pipe to the wellhead, where it is stored and eventually taken away by the company that buys it. Or it might be a dry hole, in which case the $300,000 and the independent’s time are for naught.
Jones started out by acquiring leases and selling them to bigger independents, who operated the wells. But in the last couple of years he has begun to be an operator himself, and as his capital increases, so does his share of the take when he hits. His batting average so far is excellent—in his career as an independent he has been involved in 20 wells, of which only three have been dry holes. He plans now to operate more wells and to drill higher-risk projects, staying away from areas near previous finds and trying for bigger scores.
Certainly a large part of why he does it is the money. “When you’ve been poor all your life,” he says, “money is an important factor. For instance, I’ve always dreamed of having an airplane and now I have one, a little Bonanza.” Money has an importance for the independent that it doesn’t have for the aspiring actor or ballplayer because it’s his single standard of success. There’s no such thing as a well that loses money but is a critical success. There are no cheering audiences. You don’t get your picture in the paper. More than that, for a person without a salary, whom a bad year could utterly wipe out, what seems like an awful lot of money is necessary to provide the security that everybody else already has, along with the freedom to thumb your nose at the world that’s so important to most independents. Every liberal professor can extol at length the wonderfully liberating effect of academic tenure, but few can see that for an entrepreneur, money in the bank is exactly the same thing. Of course, there’s a definite point where that kind of freedom is reached, and oilmen shouldn’t be allowed to get away with convincing the world that they need infinite millions to feel truly independent; that aside, their interest in money shouldn’t be seen as a sign of fatal moral defects.
Anyway, Jones says money isn’t the most important factor in his business. He says it’s “the self-satisfaction of achieving.” Most independents have spent a lifetime in the oilfields, and most of them love it—finding places to drill where nobody else has thought of drilling, putting together a deal, running their own operation the way they think it should be run, and then, maybe, finding a new field. “Most independents are in it for the romance,” another independent told me, “but most of them won’t admit it.”
The romantic and acquisitive sides of the independent’s character combine in a rich hatred of the federal government that practically all of them share. Independents complain bitterly about being bogged down in a sticky morass of paperwork and regulations, in a tone that would be familiar to readers of Ayn Rand novels. They see themselves as self-reliant, tremendously productive people under constant attack from lily-livered, parasitic bureaucrats. Texans like to point out, with triumphant illogic, that the Department of Energy spends $20 billion a year and has never found a gallon of oil.
In understanding their hatred of federal paperwork, it’s necessary to understand that independent oilmen are not the type who fit comfortably into organizational life. In 1967 a female auditor from the IRS called on Jones and, he says, “inferred I was lying. I said if she was a different gender I’d rearrange her face, and threw her out of the office.” Then he went to Dallas and told the regional director there what he thought of the IRS. Every year since, Jones says, he has been audited. His accountant now handles all his dealings with the IRS—”I don’t care to see ’em because I get a little emotional.”
Besides taxes, there are some regulations governing drilling sites. Portable toilets are required, the bottom steps of ladders have to be painted yellow, and sometimes the OSHA inspectors come around. All that, however, is the concern of the drilling contractor and not Jones, as are the minimum wage and workmen’s compensation. To drill on private property in Texas, Jones has only to fill out a one-page form from the Texas Railroad Commission; to drill on federal parkland requires a lot of paperwork, mostly for environmental reasons. I asked Jones how many federal agencies he deals with, and he said, “Just pick a number. They’re all in the act. I never see the forms. I have men who take care of that for me. But they’re unreal.” Another independent told me he has to file “many, many thousands of forms for the government. Instead of free enterprise, we’ve got bureaucratic regulations. They’re a bunch of traitors in Washington. Instead of encouraging finding oil they’ve tried to stop it.” When I asked him to tell me what, specifically, some of the paperwork was, he thought for a minute, couldn’t think of any good examples, and told me to talk to his accountant for the particulars. When I did, all he could think of was taxes and price regulations.
Price regulations are where the government’s effect on the oil business rises above the symbolic level. There are two sets of such regulations, one for oil and one for gas. The aim of both is to keep low what consumers pay for energy. Natural gas is unregulated when it’s sold within a state, but there’s a strict ceiling on the interstate price. As a result, in a producing state like Texas where under normal conditions intrastate gas would be cheaper than interstate, in fact the reverse is true. There are also price ceilings on oil—an extremely low one for oil from old fields and a much more generous one for new oil. The new oil-old oil distinction is a complicated one and the source of a lot of litigation; but the most significant point in the dispute between the oil business and the government is whether the price ceilings have lowered the incentive to drill so much that we aren’t getting as much oil and gas as we need.
Whether or not this is true is the subject of constant debate, in which the main weapons are studies of oil reserves and future consumption commissioned by the two opposing camps. What non-speculative evidence there is is hard to judge because the years since the embargo have been such good ones for the oil business anyway. Since 1973 about 1,500 new independents have entered the business, and domestic drilling has been booming. Natural gas producers sometimes complain that it’s no longer profitable to drill for sale on the interstate market, but Jones makes a handsome living selling natural gas to the interstate pipelines and says he doesn’t know of anyone who has refrained from producing proven wells because of the low price. Independent oilmen generally concentrate totally on drilling, and for the most part they just don’t care what somebody they’ve never met in New York has to pay for utilities. They can be relied on to oppose any tax, any price control, anything that interferes with the untrammeled drilling of wells and selling of petroleum. The large-scale social contract, when it touches their lives, makes them feel oppressed.
If the independents’ political vision of themselves as tied-down Gullivers doesn’t ring very true, it’s no surprise—they don’t fit into anyone’s political cosmology very well. Independents who think they’re crippled by paperwork and held back from drilling by regulations are far more numerous than independents who actually are so constrained. They habitually undersell their own drive to drill, which is much too strong for a little paperwork to kill.
Similarly, a Jack G. Jones falls into a great gap in American liberalism, the failure to appreciate productivity (growing, perhaps, from an inability to distinguish it from the profit motive). Jones not only helps heat people’s homes, he stimulates employment and creates taxable wealth that, were he to retire tomorrow, might never be generated. This kind of wealth is crucial to the government’s ability to heal the sick, feed the hungry, and push upward the disadvantaged. Encouraging people like Jones ought therefore to be a central part of the program of those who want to expand the state’s benefits to the people who need them. It’s not. Even so well-thought-out and impressive a liberal call to arms as Howe’s in The New Republic just doesn’t mention the issue of encouraging production.
Conservatives generally appreciate production but don’t see that it springs from several different sources in the free enterprise system. Encouraging Shell won’t necessarily also encourage Jack Jones, and saving a Lockheed won’t boost free enterprise at all. A key part of the conservative program might be making sure that sizable small-business sectors flourish alongside the corporations in each industry in order to keep the industry strong. Conservatives also fail to be convincing in their stated devotion to the idea that healthy business is a means to an end (a healthy country), rather than the end itself. They almost never seem to see poverty or need or stagnation without prompting from the left.
Not every conservative deserves to be tarred with the accusation of not really understanding free enterprise, but examples certainly abound. Many of them can be found in the pages of Fortune, supposedly the epitome of capitalism. Fortune always stoutly defends economic concentration, missing or disagreeing with the point that diversity in any business is a great generator of ideas. Most recently, in discussing the rash of mergers among investment houses (which has led to the demise of many small and regional houses), a Fortune writer brought up the argument that fewer brokers will produce fewer ideas, soberly considered it for maybe half a sentence, and then pronounced it wrong.
Liking What You Do
The misapprehension of the importance of the entrepreneur in policy discussions is mirrored—maybe based—in similar misapprehensions about human motivation. Traditionally, liberals have felt that government operates with the public interest in mind and business with only the profit motive, so that the ability of anyone who makes a profit to contribute to the betterment of society is suspect (and, conversely, the devotion to the public good of anyone who works for a non-profit organization is unquestioned). Recently, the neo-conservatives have begun to attack this notion by weighing in with their own version of the motivational scheme: while business is out for profit, liberal professionals, civil servants, and professors comprise a “new class” that lusts, no less self-interestedly, after power instead of money. Farther on over to the right, in the Jack Kemp-Arthur Laffer tax cut camp, the theory is that the only way to create an innovative, prosperous society is through maximizing individual financial incentives. It was in that spirit that Fortune recently explained that any attack on the tax-deductibility of businessmen’s entertainment costs is really an attack on “excellence itself.”
These formulations leave gaping holes. For one thing, they all assume that the desire for money is a simple matter, which it isn’t. In an affluent society like ours, where most people can afford life’s essentials, money is mostly symbolic and relative—and therefore quite elastic—in value. Even among those to whom money is important, there’s a tremendous difference between wanting the steady, dependable salary increments that people who work for government and big business receive, and the risky, high-payoff gambles that independent oilmen and other entrepreneurs are after. For one group, a fully-vested pension might be a tremendous incentive to work toward; for the other, it would matter not at all.
Another great problem with all the motivational schemes is that they don’t take into sufficient account the tremendous power of simply liking what you do—whether or not it’s profitable, whether or not it helps society generally. That’s a big part of what drives the wildcatters and actors in the world, and just creating an atmosphere where they can do what they love freely is a tremendous incentive to the production of larger social goods. For all these reasons, we ought to be looking into what it is—in financial, legal, and social terms—that keeps the Jack G. Joneses of the world in action. Why is it, for instance, that independent oilmen are flourishing and independent investment houses, which are of enormous helpful potential, are dying? What can we do to encourage the people who make the country grow and change without simultaneously giving undeserved rewards to people who don’t do those things?
Part of the answer is to create an atmosphere where entrepreneurship is more widely appreciated, a more common feature of the dreams of the young and a greater source of pride and prestige for the fully grown. That’s a difficult program to legislate; it has to go on in schools, at dinner tables, in newspaper columns. But it’s also worth looking into actions the government could take, actions that would involve financial rather than emotional incentives.
The main thrust of these ideally would not be giveaways to one special group or another (the oil business was for years the beneficiary of one of the most generous of these, the percentage depletion allowance), but across-the-board incentives to entrepreneurship. The best vehicle for such incentives is the tax system. We might give tremendous capital gains breaks to investors in new enterprises while taking away the breaks for trading in old stock. We might take away the tax deductions for interest on loans to buy consumer goods like washing machines while allowing those deductions for the person who takes out a loan to start a laundromat. We might take away the tax exemption for interest payments on state and local government bonds, which takes capital away from risky enterprises. We might allow investors in new businesses to deduct these business losses from their personal income, a break now available only to investors in partnerships and very small companies. Tax policy has generally lumped together all businesses, old and new, large and small, but it need not.
“You have to have a certain amount of organization in America,” says Jack Jones, and he’s right. The amount we’ve got now, in fact, seems more than ample. “For myself,” he says, “I don’t need it. That’s one of the beauties of the oil business—you can get by with a minimum number of people. I hire a few people part time, but mainly I like to do it all myself.” Operating this way, Jones can make contributions it’s hard to believe in your heart the government or Exxon could make nearly as well. For that reason, there ought to be a way to persuade alot more of us to do it all by ourselves too.