Untold damage has been done by governments that restrict human action in attempts to correct perceived market failures. Like a pebble dropped in a pond, each government action ripples through the economy in ever-widening circles, yielding unforeseen consequences that create demands for additional government intrusion. Ironically, when the market failure that provided the excuse for the initial intervention is closely examined, it usually either vanishes or turns out to have been a failure of government instead. Robert Bradley’s new book, Oil, Gas, & Government, takes a critical look at the supposed market failures of the petroleum industry, and at the confusing swirl of regulations that our government spewed out to deal with them.
Many such regulations stemmed from attempts to deal with problems created by the rule of capture, by which oil is owned by whoever pumps it out of the ground—regardless of under whose land the oil was originally located. This rule created an incentive for oil producers owning or leasing adjacent pieces of land lying atop the same reservoir to pump out the oil as fast as possible despite any reservoir damage that such rapid production might entail. In addition to the loss of recoverable oil, economic losses were considerable, as producers drilled more wells than would have been needed simply to recover the oil. Bradley points out how a homestead approach to the ownership of oil would have avoided the destructive competition to be the first to drain the reservoir. Under Bradley’s scheme, ownership of an entire reservoir would go to the individual or company that first discovered or homesteaded it, and not necessarily to the owner of the surface rights.
Even with the court-imposed rule of capture, however, oil producers could still have solved the problem of overdrilling and too-rapid production on their own, had government left them free to act. Free companies would almost certainly have sought to reduce drilling costs by unitizing their fields, i.e., letting one of their number control production, while all shared in costs and profits according to a negotiated formula. Antitrust laws, however, prevented such cooperation for decades.
During both World Wars, federal government attempts to control oil production to ensure a steady and affordable fuel supply for the military backfired. First, the government inflated the money supply to help finance the wars, then responded to the resulting rise in oil prices with price freezes. By keeping the price of fuel below its market-clearing price, regulators encouraged consumption and discouraged production—the precise opposite of what was desired. After each war, these emergency controls were dropped. In both cases, decontrol was followed by a boom in production and a drop in prices—clearly revealing the counterproductive nature of the government’s intervention.
To finance the war in Vietnam and the War on Poverty, President Lyndon Johnson again inflated America’s currency. Johnson’s successor, Richard Nixon, attempted to treat the inevitable symptoms by freezing wages and prices. These controls, coming during the driving season and before winter, locked in seasonally high gasoline prices and low fuel-oil prices. Refiners were thereby encouraged to substitute gasoline production for fuel-oil yields. With the coming of cold weather, oil supplies became tight and the government had to loosen its policies. The Energy Crisis, along with mandatory allocation and conservation, was already well under way before OPEC announced production cutbacks on October 17, 1973, to protest U.S. policy in the Middle East. Clearly, the real cause of the oil shortage in the seventies was U.S. government policy, and not the Arab oil embargo.
Oil, Gas, & Government fills an important niche. It documents every federal oil and gas regulation since 1861, their rationales, and their results. Extensive footnotes, three indexes (by name, subject, and legal case), and a good appendix provide easy access to the information contained in the book’s two volumes and nearly 2,000 pages. By filling this niche with a work solidly based in free-market economics, Dr. Bradley’s book is well positioned to have a far-reaching impact. His lead is one that other free-market economists would do well to follow. Industries, such as shipping and railroading, also offer both compelling histories, and heavy legacies of destructive government meddling. Similar works documenting these areas would provide powerful support in the drive toward economic freedom.