Most oil reservoirs lie under tracts of land which are held by numerous owners. In such cases, any oil produced from a reservoir is (according to the so called "law of capture") held to belong to the owner of the particular surface area at which it issues from the ground. If oil were fixed in place, as solid minerals are, this would not lead to great complications. But, as a migratory liquid, oil will issue at the surface according to the number, location, and rates of production of the wells which are drilled to tap the reservoir.
Under the terms of the law of capture, the faster any one of the multiple owners of an underground reservoir could drill and lift on his land, the more oil he would end up with. The result, during an earlier period in the history of the oil industry, was a rush to sink wells and produce oil, with undesirable price consequences for oil producers and the producing states, rapid alternations of low and high prices for consumers, and unfortunate effects on the conservation of oil resources.
The latter was the most serious consequence from a broad social point of view. It meant that much of the underground oil would never be recovered—or recovered only at much higher costs—because the oil pool was not being drained according to efficient engineering practices which would utilize to the full the natural gas or water pressure of the reservoir. Instead, natural pressures were being prematurely dissipated through excessive drilling and production.
By the early 1930's the results of this unrestricted drilling had become serious enough to bring about governmental action, which has resulted in a system of regulation in which the decisive controls are exercised at the state level. The policies and practices of the member states are loosely coordinated through an Interstate Oil Compact Commission, approved by Congress in 1935. Participating states agreed to enact laws to prevent physical waste in oil production arising from certain specified causes. The Compact Commission's role was limited to fact finding and to offering recommendations to the states concerning methods for reducing waste and for achieving greater long-run recovery of oil resources. The system was rounded out by federal government responsibility for prohibiting the interstate movement of oil produced in violation of state regulations, but this activity is of small importance today. In more recent years the really significant contribution of the federal government to the maintenance of state regulation has been through the imposition of controls on the importation of lower-cost crude oil.
State regulation was the response to problems caused by the unrestrained pursuit of individual property interests in producing oil from a commonly held resource. Therefore, although one essential aspect of regulation is the attempt to enforce greater efficiency through the imposition of rules which all of the property owners must observe, the regulatory commissions also are required to observe established legal principles in protecting the rights of individual property holders. Consequently, although productive efficiency has improved greatly under regulation, the protection of individual property rights within the prevailing system of regulation has compromised this objective.
Amongst other solutions, a growing number of states have enacted laws empowering regulatory bodies to compel "unitization" of production when a large majority of the affected owners agree. This is a scheme, practiced also on a purely voluntary basis, whereby an oil pool is operated as a single unit, with each owner benefitting in the proceeds of production in proportion to his share in the property. In return the individual owner surrenders his right to carry out his own production and drilling.
For the near future, however, the pattern of piecemeal reforms is likely to continue. Hundreds of thousands of wells have been drilled in the expectation that the climate of regulation would not be radically altered and there is much resistance to unitization, especially among minor producers. Present indications suggest a step-by-step process with some states taking the lead in enforcing improved practices and others following as a result of competitive pressures.
Adapted from Energy in the United States: Sources, Uses and Policy Issues, by Hans H. Landsberg and Sam H. Schurr, published by Random House in 1968.
A version of this article appeared in print in the May 1968 issue of Resources magazine.
