AT ninth annual conference of Harvard Committee on Economic Research held a year ago, it was pointed out by present writer that oil industry had been passing through era of unprecedented and even revolutionary advances in technology without corresponding progress in art of economic and conclusion was advanced that the petroleum industry in 1928 faces and will attempt to solve its greatest problem issue of economic The year of I928 has been characterized by two outstanding features: first, progress toward economic control within industry, which has taken form of partial rationalization of crude oil production in United States and of a trend toward cartelization abroad; and, second, a betterment in statistical position and price of gasoline, resulting in favorable profits for manufacturers and distributors of that commodity. The first development was outgrowth of necessity, and was brought about by planned control on part of industry, aided by state and federal authorities. The second development was primarily resultant of natural economic forces, though regarded in many quarters as also an outgrowth of control. These two developments should be plainly distinguished if a clear perception of current status of petroleum situation is to be gained. Nineteen hundred and twenty-eight was entered on a low and unprofitable price level, with a potential crude oil supply in sight that, if left to a normal development, would have greatly exceeded physical ability of industry to cope with output. In consequence, it became necessary to stem impending flood of oil, and steps were taken in menacing flush fields of Texas, Oklahoma, and California to retard production by cooperative methods of proration and drilling shut-downs. These efforts were initiated by operators themselves, but were subsequently stabilized by invoking authority of states involved through jurisdiction of Commissions charged with responsibility of conservation and prevention of waste. In this manner. rate of outDut of prolific pools of Permian Salt Basin in West Texas was curtailed to a small fraction of potentiality; drilling up of several pools in Seminole District in Oklahoma was staggered and spread out over year; and some production was shut-in in California. As a result, crude oil production was maintained at about 2,400,000 barrels per day for first 8 months of year and around 2,500,000 barrels per day since August, thus permitting demand to catch up with supply and bringing about statistical equilibrium. These results were not obtained without great effort and there were many set-backs and numerous local situations where efforts at control failed. Yet, by and large, it was demonstrated that at low prices crude oil supply could be regulated within certain limits. Coincident with these efforts to rationalize crude oil production in United States, progress in direction of improved economic control was witnessed in other directions, particularly in appearance of a trend toward cartelization of a group of foreign oil companies, organization of plans for formation of an American Export Association for cooperative handling of petroleum export business, and improvement in domestic trade practices in distribution of gasoline. Yet, in main, it was not from achievements in artificial economic control, as important as they seem, that financial betterment in I928 came to industry, but from an entirely different source operation of natural economic law in field of gasoline manufacture. Under influence of very low prices that prevailed for gasoline from early months of I927 until spring of I928, output of gasoline was curtailed and held at relatively low levels and, what is even more important, work on refinery expansion and cracking installations came almost to a standstill; and accordingly I928 gasoline season was entered with gasoline in a strong statistical position. This condition is indicated by fact that last March gasoline stocks were 23 per cent lower than twelve months previously and 79 per cent of co mputed normal,

D URING I927 the petroleum industry added to storage approximately 64 million barrels of oil, representing an excess of supply over demand of 7 per cent. This marginal surplus caused a depreciation in gross income for the oil business in this country, as compared with I926, of upwards of $6oo,000,000, and has given the oil companies a year of lean to vanishing profits and, incidentally, something to think about. The primary cause of this striking decline in values was the competitive and uneconomic application in the Seminole field of Oklahoma of a brilliant and recently developed engineering tool the gas-air lift with the result that the rate of production was doubled or trebled, three or four years' normal output compressed into one year, and an indigestible surplus of gasolinerich crude oil thrown on the market. In retrospect, it is becoming apparent that this new engineering technique, designed to lower production costs and increase yields, was economically misapplied at a cost to the petroleum industry of over a half billion dollars. Someone has characterized this incident as the Seminole Follies. During the past 7 years, stocks of oil have expanded I98 per cent, from I96 million barrels at the close of I920 to 584 million barrels on December 31, I927. In fact, oil in storage has increased in volume every year since I9I8, with the exception of I926 when inventories were slightly reduced. Just as I927 was marked by the application of a new phase of production engineering, so the preceding years were characterized by two outstanding technological developments of far-reaching consequences: the perfection of the art of cracking, whereby gasoline can be manufactured cheaply from fuel oil; and the rapid development of the science of geology, facilitating the discovery of new oil pools and, more latterly through the growth of geophysical methods, permitting the location of hidden structures in advance of drilling. In reviewing the course of prices during this period, one is impressed by two characteristics of the petroleum price cycle: prices were laggard in declining whenever supply began to exceed demand, while quotations were quick to advance upon the slightest tendency of demand to outdistance supply, even though the latter change might be (as it often was) merely seasonal. Inherent in this price habit was a considerable element of speculation both in respect to crude oil inventories and oil shares. As a result of such price movements, the momentum of supply was subject to recurrent periods of stimulation, in the face of growing stocks and improving technology bearing upon supply. It has been said of this period that the industry gambled on an oil shortage and lost. It therefore appears that the petroleum industry has been passing through an era of unprecedented, and even revolutionary, advances in technology, without a corresponding progress in the art of economic control. The reasons for this lack of progress in economic prescience go back to a number of ideas that time has proven to be unsound: the illusion that the storing of crude oil is a profitable undertaking; the dogma that an oil lease under no circumstance should be permitted to suffer physical drainage; the idea that extremely high prices are just around the corner ready to compensate for all the competitive excesses of the moment in short, thinking based upon incorrect premises and giving rise, under competitive stress, to unsound business practices. The oil man has not yet learned to think in terms of dollars instead of barrels. A few examples of the lack of economic foresight may be adduced from current practices as symptomatic of the situation. Last summer an operator in West Texas acquired a vacancy permit on a strip of acreage 300 feet in width, crossing a major oil pool. A well was started, which in turn gave rise to nearly ioO wells, with the result that these wells, at the close of I927 were producing 5o,ooo barrels daily, largely going into steel storage constructed to receive it. No one familiar with costs and price trends can clearly foresee a price movement adequate to pay out the cost of producing and storing this oil. In July a discovery well was drilled in the