We examine Harold Demsetz's (1967) prediction that property rights emerge and are refined as the benefits of doing so exceed the costs in the context of oil and gas resources in the U.S. Familiar influences on the development of petroleum property rights, technology, market demand, and politics, provide support for the hypothesis, and those issues are examined. 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 neo-classical sense. Our analysis provides new insights regarding the nature of voluntary unitization contracts, inherent limits to producers' ability to internalize externalities, and the welfare implications of compulsory unitization.
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Publisher Info
Paper provided by ICER - International Centre for Economic Research in its series ICER Working Papers with number
25-2002.
Length: 31 pages Date of creation: May 2002 Date of revision: Handle: RePEc:icr:wpicer:25-2002
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