Student Post: Thoughts on the Tragedy of Commons

Recently, in class the tragedy of commons was discussed through Barnard v. Monanghaela Natural Gas Co. The facts of the case were as follows. There were two pieces of adjoining lands. The owner of one piece of land brought suit to enjoin the other owner from taking natural gas that was located beneath his piece of land. The other owner’s drilling machinery was located on that owner’s piece of land. The Supreme Court of Pennsylvania held that the nature of oil and gas is “fugitive”. Therefore, “every landowner or his lessee may locate his wells wherever he pleases, regardless of the interests of others”. It was the owners responsibility to “protect his own oil and gas” by doing the same. This came to be known as the rule of capture. 

As discussed in class, the effect of this was to allow an inefficient allocation of oil and gas resources. The case of the former oil town Spindletop Texas illustrates the effects of such a rule. After a large reserve of oil was discovered on a field in that town, a series of adjacent wells were constructed to take advantage of that discovery. The net result due to increased oil production was that the value of land was driven up, oil prices were driven down, and the excessive production by multiple wells diminished field pressure very quickly. Eventually, within a decade production had ceased. When this “bubble” burst the town became a ghost town.   This in turn led to a depreciation of land value, lost jobs, and market uncertainty for the local economy. To make matters worse, less than five percent of the field’s oil was produced because of the inefficiency of the production method.

The next topic of discussion was how to overcome the aforementioned problems. It should be mentioned that that absent government regulation, there is no way to prevent this tragedy of commons. Distilling the main points brought up, it seems a multi-layered approach should be taken by the government:

1)      1) Identify existing petroleum needs.

2)      2) Either through public or private companies maintain an efficient production at as low a cost as possible. In order to implement this drilling for oil would have to be allocated separately and strict adherence to the rule of capture would have to be abandoned (i.e. mandatory pooling laws). 

3)   3) Have the produced oil sold at affordable prices (i.e. through market means or subsidies)

Much of the national discussion today revolved around such issues. Whether or not oil subsidies should be continued or market constraints removed, one thing is certain. The issue is NOT about no governmental regulation and government regulation but, rather, the optimal amount that would “tweak” the market to produce optimal results. Given the finite nature of petroleum reserves, alternative energy, and the geo-political situation that exists today, this fact should be emphasized and from which, hopefully, an honest discussion can ensue.