The Economic Evolution of Petroleum Property Rights in the United States

Abstract

We examine Harold Demsetz's (1967) prediction that property rights would emerge and be refined once the benefits of doing so exceeded the costs. We follow the gradual development of property rights to subsurface oil and gas deposits in the United States through private and political negotiations to test this prediction. The pattern has been influenced by technological change, shifts in relative prices, information asymmetries, and political factors. All in all, the pattern of property rights development for oil and gas described follows the broad outlines sketched Demsetz. But the details of the bargaining process, the importance of information asymmetries and price volatility, and the key role of politics have resulted in property rights structures that would not have been predicted in a strict neo-classical sense. Our analysis provides insights regarding the industry practice of crafting unitization agreements that distinguish between multiple participating areas and/or time-phases of extraction. Completing these agreements often is plagued by high transactions costs, and the state has intervened to force unitization. But we argue that under certain circumstances this action may not improve welfare.

Keywords: Property Rights, rule of capture, prorationing, unitization

JEL Classification: D23, N51, N52, Q38, Q49