From free enterprise in oil to regulated and subsidized enterprise in shale oil

• Free enterprise in 19th Century/early 20th Century oil industry vs. regulation and subsidies of later 20th Century oil industry in America. Excerpt from great article by Barry Paulson of the University of Colorado below:

[from Barry Paulson, Technological Change and the Profit Motive, JLS, Summer 1987, pp. 262-264]

The market has not solved the energy crisis in the twentieth century as it did in the nineteenth because the market has not been permitted to operate. Recent legislation calls for deregulation of prices of natural gas and petroleum products, but this does not mean a return to reliance on private enterprise to solve the energy problem. Private energy companies are threatened with windfall profits taxes and disfranchisement of their holdings. Regulatory controls limit exploration and expansion of production and increase the costs of producing energy products.
In short, private entrepreneurs today do not have the incentive to explore and expand production of existing energy products-and to find cheaper substitutes for energy-as they did in the nineteenth century.
The government has assumed a greater responsibility in solving the nation's current energy crisis by subsidizing private firms to develop alternative sources of energy. The U.S. Synfuels Corporation has become the vehicle for this expanded role for government in the development of alternative energy sources. The U.S. Synfuels Corporation was created by Congress in 1980 with authorization to spend $20 billion in government funds. After three years of operation, the Synfuels Corporation made its first award of financial assistance, $820,750, to a North Carolina peat-to-methanol project whose investors include former CIA director William Casey. It also awarded $120 million in price guarantees to a Cool Water Coal project in California. Most recently, the corporation has signed a letter of intent with Tenneco Shale Oil Company and Occidental Oil Shale, Inc., for the development of oil shale in Colorado. The proposal calls for $2.19 billion in guarantees, including $1.812 billion in loan guarantees and $378 million in price guarantees. Under the agreement, the private corporations would be guaranteed a price of $60 per barrel over a ten-year period from 1987 to 1997.33 The role of the government in the development of oil shale reveals the inherent failure of a government solution to the energy crisis. The guarantees between the Synfuels Corporation and private companies virtually assure that there will be no market test for an efficient allocation of resources in the development of oil shale. The Colorado project will proceed even though the market price for the final product falls below the guaranteed price. The loan guarantees assure the private corporations' access to loanable funds, even when the market interest rate on loanable funds signals that the project should not proceed. It is not clear that the subsidized corporation will advance technology, since the Colorado project will utilize a combination of processes for the production of oil shale already developed by private corporations.
...
More important than the misallocation of resources through the US. Synfuels Corporation is the negative impact of government policies on the private development of oil shale. The Mineral Leasing Act of 1920 limits private development of oil shale to no more than 8 square miles (5,120 acres). Government regulations also prohibit off-tract disposal of processed shale.
A recent Rand Corporation study shows that these restrictions on the size of the tract and on off-site disposal significantly reduce the efficiency of shale oil development. Permitting off-site disposal of processed shale alone could increase the percentage of shale oil recovered on private lands from less than 20 percent to more than 60 percent. [36] Antitrust policies have also had a negative impact on the private development of oil shale. Each developer is limited to one lease, and federal policies rule out joint processing ventures.
The Rand study concludes that this combination of antitrust policies and land use policies has resulted in a fragmented industry of first-time developers. The report states, "Given the innovative processes required to produce shale oil, these developers may be unwillmg to make large investments in a first of a kind plant."" It should not he surprising that some corporations have chosen not to follow through on private shale oil projects. For example, the Exxon Corporation has withdrawn from its Colony Shale Oil Project in Colorado. Private corporations face an industry in which government land policies and antitrust policies have eliminated the profit incentive of large scale innovative technology in oil shale development. They are asked to compete with a government-subsidized corporation whose price and loan guarantees protect it from competitive market pressures. Government decision-making is virtually displacing private entrepreneurship in the oil shale industry.
Some studies, such as the Rand Corporation study cited earlier, maintain that this pattern of decentralized development of oil shale may not necessarily be bad. "An industry consisting of many small projects would be more competitive than a highly centralized industry." This perception of competition in the shale oil industry is based upon the static neoclassical model of competition, a perception that underlies the antitrust and regulatory policies affecting the industry. Despite overwhelming evidence that those very policies preclude the dynamic competition required to develop oil shale efficiently, we cling to this naive view of the nature of a competitive market.

(from pp 262-264, Barry Paulson, Univ. of Colorado, Journal of Libertarian Studies, Summer 1987).

Full pdf file of this JLS articles in this issue, including Paulson article