‘Theft of the Subsoil’ (Guillermo Yeatts on Latin/South America mineral-rights reform)

“[There is] a general economic maxim: public [government] resources are really private, owned and exploited by a political elite, while private resources are really public, owned and managed by a multitude. Government-owned resources do not ‘belong to all of the people’ and allow ‘self determination;’ they belong to none or a very few.”

– R. Bradley, Foreword to G. Yeatts, Subsurface Wealth: The Struggle for Privatization in Argentina (Foundation for Economic Education, 1997), pp. xv–xvi.

The recent reform of Mexico’s Constitution to allow private investment (up to $20 billion in production-sharing agreements) still leaves state-owned PEMEX with a legal monopoly for oil and gas development inside the country. But it is a start at reform that may turn into a deregulatory, privatization dynamic.

More, indeed, awaits to open the energy sector internal and external competition and to foreign investment in any amounts:

1) Competition to PEMEX in all oil and gas areas should be legalized;

2) PEMEX shares be allocated to the country’s private citizens;

3) Subsoil mineral rights should be assigned–with deed of title–to the (private) surface owners of land. Surface land not privately owned can be privatized with mineral rights attached.

Thus, Mexico’s recent reform can be seen as the first of four steps to fundamental reform so that mineral wealth can benefit the masses, not just a political elite.

Subsoil privatization has been championed for South and Latin America for more than two decades by the classical-liberal businessman, Guillermo M. Yeatts. His book Theft of the Subsoil (El Robo del Subsuelo) was translated and published by the Foundation for Economic Education in 1997 with the new title, Subsurface Wealth: The Struggle for Privatization in Argentina. I wrote the foreword for FEE’s release, which is reproduced below given the increasing relevance of Yeatts’s pioneering work.

Guillermo Yeatts in this book documents an economic tragedy of his beloved South American country. Few riches in the industrial world match the natural resource of hydrocarbons, and few are so democratically located. Yet the egalitarian wealth of oil and gas has been kept undiscovered and underutilized for over a century in Argentina despite the efforts of some of its most entrepreneurial citizens.

The lost opportunity was there for all to see. To the north in the United States, first in Pennsylvania and later in Texas, California, and other states, a large industry developed, creating bountiful private wealth and philanthropy that has remained to this day.

Had the United States reserved minerals to the sovereign and Argentina allowed private ownership, a reversal of fortunes would have occurred. Leonardo Villa might have been the industry pioneer in the textbooks and “Colonel” E. L. Drake an unknown to history, and Argentina would have been an oil exporter, and the U.S. an oil importer, in the late nineteenth and the first half of the twentieth centuries.

History of a Phantom Industry

Yeatts’ story begins with early evidence of oil seepage and commercialization activity in Argentina at about the same time as in the United States. But while one country raced to development, the other stagnated. The Spanish legal tradition, steeped in government ownership and control that excluded the many to privilege a few, stood in the way. The Constitution of 1853 attempted to codify the English tradition of private ownership based on common law, but this promise was soon lost in its interpretation by Argentina’s legislators and judiciary. The mining section of the 1871 Civil Code retained public ownership of the subsurface.

This poisoned beginning put Argentina in a negative spiral of regulation and underdevelopment. Subsurface ownership required regulation of private development, which introduced political risks to impede commercialization. Government ownership also discouraged private capital since even valuable discoveries did not create a bankable asset. From the land owners’ viewpoint, mineral development was not an opportunity but a nuisance of involuntary usage of their surface area.

With inadequate petroleum production, Argentinean authorities restricted exports, controlled inventory, set aside proven oil lands for the government usage, established purchaser requirements, and set prices. Imported supply, mainly from the United States, was the escape valve, but it underscored who was really benefitting from Argentina’s oil policy.

With private development discouraged, the government increasingly assumed the commercialization function. With this came mismanagement, outright corruption, and inefficient labor practices pursuing a variety of social purposes. Intervention in the oil sector sometimes spilled over into the general economy.

Oil product tariffs that created monopoly profits for the West India Oil Company, for example, became a reason to enact antitrust laws.

Foreign capital and know how from the United States was another escape value for the lack of internal infrastructure from government malincentives. Yet it was never enough, and Argentina’s tightly regulated oil sector predictably led to antagonism against foreign investment. Such nationalism culminated in nationalization and a State oil monopoly in 1922 — Yacimientos Petroliferous Fiscales (YPF). With complete political control, authorities could earmark indigenous supply for other government entities such as the navy and railroads.

The failure of oil policy was part of an economy-wide public policy failure under Peron’s five-year central plans and later administrations. The total economic collapse of mid-1989 had the salutary effect of economic liberalization, greater fiscal restraint, and internationalism, but one notable reform remained — privatization of the subsoil.

General Lessons

The insights of this book go beyond understanding one country’s plight with one particularly important industry. Yeatts’ findings about government ownership apply to any country and any industry. The findings are:

1) The institution of government ownership does not result from “market failure” but is an arbitrary act of political power.

2) The economic distortions created by government ownership cannot be undone by subsequent government involvement but only made worse.

3) The solution to political mismanagement must address the root cause, government ownership, and not only the cumulative intervention to it.

To the above can be added a general economic maxim: public resources are really private, owned and exploited by a political elite, while private resources are really public, owned and managed by a multitude. Government-owned resources do not “belong to all of the people” and allow “self determination;” they belong to none or a very few. Nor can private development of mineral resources be slandered as “exploitative.”

By leaving the mineral wealth unexploited, the people were exploited — not only the would-be developers and royalty owners but all the ancillary businesses constituting an energy infrastructure.

A New Path

What should Argentina do at this late but opportune date? Yeatts provides the answer — implement private ownership of the subsoil and allow market processes to take over from there. There are few strokes of the pen that can unleash as much spontaneous entrepreneurship, attract as much capital, and generate as much wealth as denationalizing the subsoil.

Yeatts’s privatization plan tends toward the “rule of capture,” a property rights assignment that for decades propelled the U.S. oil and gas industry. While this transformation is a welcome and distinct advantage of the status quo, Argentina can also consider an alternative private property rights assignment — a homestead system where the discover(s) of each contiguous reservoir can claim ownership of the entire deposit.[1] But under either assignment, the institution of private property promises to democratize a hitherto elitist industry, making Yeatts a public policy hero and many of his fellow countrymen and countrywomen beneficiaries in the process.

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[1] For the advantages of homestead assignment over the rule of capture, see my Oil, Gas, and Government: The U.S. Experience. Lanham: Rowman & Littlefield, 1996, chapter 2.