‘Oil, Gas & Government: The U.S. Experience’ (outline presentation of my treatise)

By Robert Bradley Jr. -- May 2, 2019

Back in 1996, the Cato Institute published the above two-volume treatise. Oil, Gas, and Government was the first (and still only) classical-liberal history of intervention in a major U.S. industry. I subsequently lectured on the book at Cato in Washington, DC and at a few other locals.

I recently ran across the outline/major points of my presentation, which I share below for those interested in the historical sweep of oil and gas regulation, tax policy, government ownership, and public grants.

To understand the perils of interventionism (particularly price controls and wartime planning), I document the coordination and problem solving in exploration/production, transmission/transportation, refining, and distribution/marketing. (Electricity, a separate energy industry, was not covered in the book.)

“Government Intervention in U.S. Oil and Gas Markets: Searching for ‘Market Failure’” (Synopsis of Major Themes of Oil, Gas, and Government: The U.S. Experience) April, 1996

An Old-Style Treatise

• Covers all Important Historical Episodes from Inception to the mid-1980s
• Incorporates Opposing Viewpoints
• 1,997 pages — 6,601 footnotes — 15,000+ citations
• Three Indexes (name, subject, legal cases)
• Extensively Cross-Referenced

Organization of the Book

• Theory (39 pages)
• Historical Section Chronologically Ordered by Industry Phase (upstream to downstream)

1. Exploration and Production (534 pages)
2. Transportation and Allocation (466 pages)
3. Refining (216 pages)
4. Retailing (475 pages)
5. Economic Conclusions (52 pages); Political Conclusions (55 pages)
6. Public Policy (37 pages)

Why Is The Book So Lengthy?

• More Than a Century of Experience
• Not One but Many Industries
• Oil and Gas Heavily Regulated on all Governmental Levels
• Oil & Gas Inspired Major Non-Specific Regulation Covered in the Book
• Not Only a Book on Government Intervention but Market Developments

A Treatise on Government Intervention, Not Just Oil and Gas

• Antitrust Law
• Corporate Taxation
• Government Road Building and Finance
• Accounting and Securities Regulation
• Futures Regulation
• Air and Water Emission Regulation
• Railroad, Waterway, and Trucking Regulation and Subsidization
• Labor and Safety Regulation

Distinguishing Characteristics of the Book

• Market-Process Economic Theory (“Austrian School” of Economics)
• Public Choice School of Economics/Revisionist History
• Homestead Private Property Rights Framework
• Economies of Scale/Scope

Major Themes of the Book

• Political:

“There are as many objections as there are differing economic interests.” – State of Louisiana v. FPC, 503 F. d 844 at 869 (1974)

• Economic/Political:

“One interference with competition necessitates another and yet another, and an industry of ‘rugged individualists’ becomes more and more tightly enmeshed with the government to which they originally turned in hope of protecting themselves from competition.” Alfred Kahn, The Economics of Regulation, 2 vols.(New York: John Wiley & Sons, 1971), vol. 2, p. 29

Five Controversial Episodes (“Market Failures”) in the U.S. Oil and Gas Experience

• “Natural Monopoly” of Manufactured Gas Distribution (and electric distribution)
• “Predatory Pricing” of the Standard Oil Trust
• Wartime or Emergency Planning
• Overdrilling/Overproduction Under the “Rule of Capture”  (depletion of  nonrenewable resources)
• U.S. Regulation to Mitigate OPEC/Energy Security

“Natural Monopoly” of Manufactured Gas Distribution

• Free Market Era
• Turn to Public Utility Regulation
• Plugging “Regulatory Gaps”
• Established Utility Viewpoint Becomes the “Textbook” View
• Manufactured Gas: Political Origins Similar to Electricity, Interstate Railroads, etc.
• Revisionist Viewpoint: Can Momentum Turn into Pluralism or Even Consensus?

“Predatory Pricing” and the Standard Oil Trust

• The “Textbook” View: From Ida Tarbell to Daniel Yergin
• The Economic Verdict: Price, Quantity, and Safety/Reliability
• The Folklore Examined: John McGee’s “Predatory Price Cutting: The Standard Oil (N.J.) Case”
• Standard’s Business Ethics Reconsidered

Wartime or Emergency Planning

• Supply (Initial Government Intervention) Creates its Own Demand (More Government Intervention)
• The Importance of Entrepreneurship and the “Market Discovery Process” in Normal and Abnormal Times
• Government as Resource Procurer (taxing; spending)

Overdrilling/Overproduction Under the “Rule of Capture” (Depletion of  Nonrenewable Resources)

• Textbook View: The Transaction Cost Problem and Government Solution
• Free Market Response:

1. Alternative Private Property Rights Allocation (“homestead” theory)
2. An Inherent Knowledge Problem
3. “Government Failure” and Noncooperation
4. Antitrust Law
5. Tax Incentives
6. Conservation Law Incentives
7. Public Lands Problem
8. Field Shutdowns (over asset reallocation)
9. Offset Drilling Rule
10. Common Carrier/Common Purchaser Requirement

OPEC and Energy Security

• Protecting U.S. Consumers from World Oil Price Increases
• The Breakdown of the Grand Regulatory Regime
• Import Prices (entitlements program)
• Wellhead Price Decontrol Categories
• Oil Resellers: Villains or Heroes?
• Along with Natural Gas Shortages, Oil Shortages Have Made the Price and Allocation Regulation Paradigm Lose Credibility
• Has the World Petroleum Market Made “Energy Security” Obsolete?

Alleged “Market Failures” Today

• Energy Security (DOE)
• “A Brewing Energy R&D Crisis” (DOE)
• Energy Environmentalism (PUC/DOE)
• Public Utility Regulation (gas and electric)
• “The Natural Gas Market is not Working” (Plank) to “Natural Gas Prices Are Too Low” (Wyatt)

Conclusions

• The History of Market Forces in the Oil and Gas Industry Has Been the History of Technological Change Creating New Market Orders and Business Distress to the Nonadaptive “Old Guard”

• The History of Government Intervention is the History of Turning “Buyer’s Markets” into “Sellers’ Markets” With Oil and Gas

• On Close Inspection, There is Much More “Analytical Failure” and “Government Failure” Than “Market Failure” With Oil and Gas

• Far Too Much of Our Historical Perspective Has Been Through the Eyes of the Less Efficient “Old Guard,” Not Consumer Welfare

• Historical Analysis Is Much Richer With the Insights of Market-Process Economics (General Effects Instead of “The Seen”) and Public Choice Economics/Revisionist History (“Who Benefited, Who Caused?”)

• We Not Only Need to Rewrite Important Segments of the “Official History” but Apply a Higher Analytical Standard in the Future to Better Understand the Market Order and the Unintended Consequences of Government Intervention

This lengthy treatise is out of print–but available at a hefty price with booksellers (Amazon here). A study guide to the individual chapters is in preparation by the esteemed Robert Murphy.

I am currently exploring the opportunity of having the book republished on its 25th anniversary in 2021 with minor errors corrected and a new retrospective introduction. It is my hope that this big book/treatise approach can inspire similar efforts in other U.S. industries to better understand the process of interventionism (reformer- and/or business-led) to better inform public policy.

Stay tuned.