Production Regulation (Conservation)
In chapter 4 we developed the theory of the optimum rate of extraction for a mineral deposit and suggested that unless prospective lessees could anticipate extraction at the optimum rate, the lessor would not capture all the pure economic rent available. It was indicated that in the production of minerals other than oil and gas profit-motivated behavior by competitive producers tends to assure the optimum rate of extraction; but in the case of oil and gas such behavior leads to an excessive investment in wells, too rapid an extraction of minerals, and too great a loss of ultimate recovery. Some form of regulation of the rate of oil and gas production is in the interest of society, not only from the point of view of conservation but also from the point of view of maximizing the capture of pure economic rent on publicly owned lands. In this chapter we will examine existing regulations pertaining to oil and gas production on federal lands and will suggest some changes with a view to maximizing the capture of pure economic rent.
We must make a distinction between regulation of oil and gas production on onshore public lands and such regulation on the outer continental shelf. In the former area federal regulation is heavily conditioned by state regulation; indeed, the federal government, through the Geological Survey of the Department of the Interior, largely defers to the states in which federal lands are located as to the content (but not enforcement) of regulations. On the outer continental shelf, however, the federal government (through the Geological Survey) is the sole regula-