Economic Aspects of Oil Conservation Regulation

Petropolitics : Petroleum Development, Markets and Regulations, Alberta as an Illustrative History

“…Within North America, the first instance of proration of oil production by a public regulatory agency was in Oklahoma in 1915, but the most significant factor was probably its adoption by Texas in 1932 (Lovejoy and Homan, 1967;McDonald, 1971;Breen, 1993;Daintith, 2010). Proration of oil production by government regulation was introduced in Alberta in 1938, for the Turner Valley Pool, and remained in effect until the late 1980s.…”

“…Prorationing in combination with other regulations (in particular minimum well spacing) clearly reduced the overinvestment and price instability associated with the rule of capture. However, economists have long argued that prorationing fails to internalize the real externality associated with the rule of capture, that is, the lack of clearly defined property rights over the oil in the ground (Adelman, 1964;Lovejoy and Homan, 1967). One criterion of economic efficiency that we have utilized in our comparison of market-demand prorationing to unitized conditions is that of cost minimization: clearly economic efficiency requires that oil be produced in a least-cost manner.…”