Congress stopped Texas oil cheating by banning interstate hot oil

The East Texas Oil Field, discovered in 1930, turned out to be the largest oil field found in the United States to that point — 140,000 acres across five counties, holding an estimated five and a half billion barrels — and the resulting drilling rush flooded a market already collapsing under the Great Depression, driving the price of oil down from over a dollar a barrel to roughly 25 cents.

Texas tried to control the glut by limiting how much oil each well could legally produce, capping output at 1,000 barrels a day starting in April 1931, but courts struck the state's proration orders down as illegal price-fixing, and even where limits held, producers who ignored them simply shipped their excess — "hot oil" — across state lines to buyers who had no reason to ask where it came from. Texas's regulatory authority stopped at its own border; the market for its oil did not.

Congress passed the Connally Hot Oil Act, signed into law on February 22, 1935 and sponsored by Texas Senator Thomas Connally, which used the federal government's constitutional authority over interstate commerce — a power no individual state possessed — to simply prohibit shipping oil across state lines if it had been produced in excess of a state's own quota, backed by fines of up to $2,000 and prison terms of up to six months.

Used federal interstate-commerce power to ban shipping oil produced over a state's own quota, making overproduction unprofitable without policing a single well.

State limits were unenforceable because producers could sell excess oil across state lines.

The federal government had clear constitutional power over interstate commerce.

Banning interstate shipment made over-quota oil worthless, so producers stopped producing it.

States kept setting quotas, so the federal role was minimal and constitutionally solid.

When local rules fail because cheaters cross a border, use the authority at that border to cut off the market, not to tighten local enforcement.

The law didn't set a single production limit itself; it let each state keep setting and enforcing its own quotas while making violating them pointless, since over-quota oil could no longer find a buyer anywhere outside the producer's own state. Hot oil production collapsed once the interstate market for it disappeared, and the act — originally set to expire in 1937 — was made permanent and remains in force today.