The Connally Hot Oil Act of 1935 came about as a result of the federal government's attempts to deal with the problem of hot oil-petroleum produced in violation of state and federal quotas and regulations. In the early 1930s the overproduction of oil, largely a result of the East Texas oil boom, was adversely affecting the oil market. As part of the National Industrial Recovery Act in 1933 the federal government enacted regulation prohibiting the transport of petroleum that exceeded state quotas of production. The United States Supreme Court struck down the NIRA, including the petroleum-related provision, thereby prompting the federal government to seek new legislation in the attempt to stop hot oil.
Senator Thomas Connally of Texas sponsored a bill known as the Connally Hot Oil Act. It became law on February 22, 1935. In general, the law was intended to protect foreign and interstate commerce against "contraband oil" and encourage the conservation of United States crude-oil deposits. It prohibited the shipment of hot oil. Under the law the president had the power to prescribe regulations and require certificates of clearance for petroleum and petroleum products to be moved interstate. It called for the establishment of boards to issue certificates. Boards could conduct hearings and investigations regarding the enforcement of the act, and the United States District Courts had exclusive jurisdiction regarding judicial matters and disputes over denied permits. Violators of the law paid a fine of up to $2,000 and were sentenced to as much as six months' imprisonment. The federal government could seize the contraband oil, though it had the option to return it to the original owner in cases of extreme hardship.
Though the legislation was intended to expire on June 16, 1937, it was maintained afterwards as a permanent law. There was some debate as to the law's effects on the transport of other fuels such as coal and timber, and many independent oil producers vehemently opposed the government regulations. However, in 1937 four federal courts upheld the Connally Act, which was later administered by the Federal Petroleum Board, a part of the Department of the Interior.