Academic journal article Northwestern University Law Review

Contracts, Combinations, Conspiracies, and Conservation: Antitrust in Oil Unitization and the Intertemporal Problem

Academic journal article Northwestern University Law Review

Contracts, Combinations, Conspiracies, and Conservation: Antitrust in Oil Unitization and the Intertemporal Problem

Article excerpt

"[A]n appeal to independently acting consciences selects for the disappearance of all conscience in the long run, and an increase in anxiety in the short."

-Garret Hardin, The Tragedy of the Commons1

I. INTRODUCTION

The availability of domestic oil resources is of vital importance to the American economy and military.2 But the American regulatory scheme to conserve oil resources has been plagued with legal and political problems.3 Since the inception of the American oil industry, the rule of capture has created serious inefficiencies resulting in losses from over-drilling.

The significance of oil conservation is ever-increasing as the world depletes known oil reserves without significant discoveries of new reserves.4 Currently, the United States is heavily dependent upon foreign sources of oil.5 One American government estimate reports that the Organization of Petroleum Exporting Countries ("OPEC") has received $7 trillion from American consumers in the three decades since the first oil embargo.6 Relying on foreign sources of oil is far too dangerous because oil is "the motivating force of industrial society ... an essential element in national power, [and] a major factor in world economies."7 The conservation of domestic resources is a major priority for national security and the economy.

While hydrocarbon deposits have been discovered underwater on continental shelves, many international legal issues exist with respect to the sovereign ownership rights of these resources.8 With the current political instability of the Middle East, the security of overseas sources of oil is constantly at risk, and a reliance on foreign sources of oil9 poses serious dangers to the heavily energy-based American economy and military.10

The conservation of currently available domestic oil resources has been debated by scholars since the beginning of the twentieth century.11 In particular, the ownership of transmigratory materials caused courts to resort to creative and imaginative jurisprudential methods. In the seminal case of Westmorland & Cambria Natural Gas Co. v. Dewitt, the Supreme Court of Pennsylvania analogized oil and gas to ferae naturae.12 Extending this analogy, the court eventually ruled that ownership of these minerals was not tied to ownership of the overlying land, but subject to the rale of capture, a legal doctrine generally applied to wild animals.13 Under the rule of capture, a landowner had to extract the minerals from the ground and into his possession to claim ownership.14 As a result of the application of this common law doctrine, oil drillers went on a mad dash to prevent neighboring landowners from sucking oil away and to create title to the valuable mineral.15

This rush to drill was inefficient, however, because of the geological structure of oil fields. While a controlled rate of drilling provides an optimum level of oil recovery by controlling the amount of released pressure, uncontrolled over-drilling allows great amounts of pressure to escape, consequently reducing the amount of recoverable oil.16 Futhermore, entrepreneurial and inexperienced oil drillers neither had the technological knowhow nor the economic incentives to limit their production.17 Thus, the rale of capture in oil fields resulted in a classic prisoner's dilemma with wasteful inefficiencies and large amounts of unrecoverable underground oil.

Unit operation, more commonly referred to as unitization, provided a solution to the negative externalities of the rale of capture.18 In a unitized field, the producers do not only drill on their particular plot of land. Rather, the owners of all tracts of land within the oil field combine to plan for a controlled rate of production throughout the field.19 Thus, unitization allows for an optimal level of production without regard to overlying property titles.20 Because unitization provides the most natural and economically efficient means to recover oil,21 states began legislating statutes encouraging, or making compulsory, unitization. …

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