The economic evolution of petroleum property rights in the United States

Abstract

We examine Harold Demsetz's prediction that property rights emerge as the benefits of doing so exceed the costs in the context of oil and gas resources in the United States. Familiar influences on the development of petroleum property rights, technology, market demand, and politics provide support for the hypothesis. Our primary contribution is to demonstrate the important role of a less familiar factor, the presence in the reservoir of both oil and gas with differentially volatile prices. This factor has affected the nature of the property rights assigned with unitization, an institutional arrangement to internalize the common-pool externality. Information asymmetries and conflicting price expectations have resulted in unit agreements that would not have been predicted in a strict neoclassical sense. Our analysis provides new insights into the nature of voluntary unitization contracts, inherent limits to producers' ability to internalize externalities, and the welfare implications of compulsory unitization.