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Is prorationing efficiency-enhancing or rent-seeking?: Evidence from a natural experiment

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  • Foreman, R. Dean
  • Kleit, Andrew N.

Abstract

Prorationing is used as a textbook definition of a solution to the market failure presented by the common pool aspects of oil and natural gas (see, for example, Spulber, 1989, 59). Yet, at the same time, the academic literature on this question is severely limited. To fill this void, we analyze a recent natural experiment in Oklahoma to determine the impact of rule changes that increased the stringency of prorationing and constrained natural gas production at the well level for one year. Prorationing in Oklahoma no longer serves to address common pool problems, as the affected hydraulically fractured wells do not suffer from common pool problems. Instead, we show that prorationing reduced natural gas production by large companies but had a significantly weaker impact on the production by small companies as well as those headquartered in Oklahoma. This gave the less affected companies an important competitive advantage. These findings are generally consistent with the positions that companies took to advocate for and against prorationing. The regulations can therefore be interpreted as a form of rent-seeking, with their proponents benefitting by imposing production limitations on their rivals. This work stimulates questions about the implications of prorationing in other states.

Suggested Citation

  • Foreman, R. Dean & Kleit, Andrew N., 2023. "Is prorationing efficiency-enhancing or rent-seeking?: Evidence from a natural experiment," Resources Policy, Elsevier, vol. 80(C).
    • Handle: RePEc:eee:jrpoli:v:80:y:2023:i:c:s0301420722005608
    DOI: 10.1016/j.resourpol.2022.103117
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    References listed on IDEAS

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    1. Wiggins, Steven N & Libecap, Gary D, 1985. "Oil Field Unitization: Contractual Failure in the Presence of Imperfect Information," American Economic Review, American Economic Association, vol. 75(3), pages 368-385, June.
    2. Weber, Jeremy G. & Ercoli, Thomas & Fitzgerald, Will & Nied, Paige & Penderville, Molly & Raabe, Eric, 2021. "Identifying the end: Minimum production thresholds for natural gas wells," Resources Policy, Elsevier, vol. 74(C).
    3. Robert Tollison, 2012. "The economic theory of rent seeking," Public Choice, Springer, vol. 152(1), pages 73-82, July.
    4. Gary D. Libecap & James L. Smith, 2001. "Regulatory Remedies to the Common Pool: The Limits to Oil Field Unitization," The Energy Journal, , vol. 22(1), pages 1-26, January.
    5. Chermak, Janie M, 1996. "The Economic Possibilities of Natural Gas Conservation: Antithetical Results of Prorationing Regulation," Journal of Regulatory Economics, Springer, vol. 10(2), pages 147-163, September.
    6. Libecap, Gary D & Wiggins, Steven N, 1985. "The Influence of Private Contractual Failure on Regulation: The Case of Oil Field Unitization," Journal of Political Economy, University of Chicago Press, vol. 93(4), pages 690-714, August.
    7. Shimshack, Jay P. & Ward, Michael B., 2005. "Regulator reputation, enforcement, and environmental compliance," Journal of Environmental Economics and Management, Elsevier, vol. 50(3), pages 519-540, November.
    8. Daniel F. Spulber, 1989. "Regulation and Markets," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262192756, April.
    9. Libecap, Gary D & Wiggins, Steven N, 1984. "Contractual Responses to the Common Pool: Prorationing of Crude Oil Production," American Economic Review, American Economic Association, vol. 74(1), pages 87-98, March.
    10. Robert Mamada & Charles Perrings, 2022. "“Entanglement†and the Exploitation of Common Pool Resources: A Quantum Solution to the Prisoner’s Dilemma," International Game Theory Review (IGTR), World Scientific Publishing Co. Pte. Ltd., vol. 24(01), pages 1-17, March.
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    1. Du, Weijian & Fan, Yuhuan & Liang, Sunfan & Li, Mengjie, 2023. "The power of belief: Religious traditions and rent-seeking of polluting enterprises in China," Finance Research Letters, Elsevier, vol. 54(C).

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    More about this item

    Keywords

    Crude oil export ban; Refining; Rent-seeking-;
    All these keywords.

    JEL classification:

    • Q48 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Government Policy
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • L71 - Industrial Organization - - Industry Studies: Primary Products and Construction - - - Mining, Extraction, and Refining: Hydrocarbon Fuels

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