This year’s co-Nobel Prize winner in economics, Elinor Ostrom, has sagely observed: “Humans don’t like to be suckers.” She arrived at this conclusion after studying local programs working to overcome the tragedy of the commons where individual actors competing against each other might exploit beyond sustainability common resources, be they fish in the sea, drinkable water, air quality, etc.
Ostrom’s admonition has both roots in a national energy dilemma that transpired 75 years ago and implications for the current congressional climate policy debate.
Almost eight decades ago, the Roosevelt administration dealt with a problem of the commons: overproduction. This issue stemmed from a particular rule of resource ownership the law of capture which applied to mobile below-ground assets such as oil, gas and water. Under the rule, a person who extracted the resource could sell all he or she could pump, regardless of whether it may have migrated from beneath someone else’s land.
The rule promoted oil discovery, but also waste. Landowners surrounding an oil strike would quickly drill their own wells and begin to pump it out, in the process reducing the underground pressure that enabled easy development of the resource.
In the end, overproduction helped turn energy booms to busts and made a lot of America’s oil unrecoverable. The sudden rush in the 1930s meant competitive suicide for the oil industry, as independent and major producers pumped so much oil it was being sold below cost. Texas set up pro-rationing to try to take care of the problem. California ended up with an attempt at a cartel. But states lacked the legal and regulatory wherewithal to enforce a cutback in everyone’s production and bring it back to a sustainable level.
The Great Depression only made matters worse. With producers scrambling for anything they could get, quotas were ignored and illegal “hot oil” was delivered to refineries and pipelines for whatever it could fetch sometimes amounting to as little as 4 cents per barrel in 1933 for oil that it took nearly $1 to produce. The breakdown threatened the utter collapse of the U.S. oil industry, as seen by the new Roosevelt administration’s interior secretary, Harold Ickes.
Ickes warned it was imperative to get the energy sector back on a sustainable economic path, noting “without oil, American civilization as we know it could not exist.”
He first considered setting a price floor for oil, asking Interior Department lawyer J. Howard Marshall II who would later become an oil titan to put in place price controls that Marshall had advocated when he was a Yale Law Review editor.
Marshall, though, soon discovered that a price floor set by government fiat would only put more hot oil on the market, wasting more of the nation’s vital common resource. So, instead, he got Ickes to sign off on a plan to manipulate demand by requiring certificates of clearance for legally produced oil shipped in interstate commerce. A federal tender board would track the certificates at the refineries and pipelines the choke points for oil demand and production to make sure they squared with quotas set for oil leases. And to keep imports from blowing this scheme to smithereens? A special import tax of 21 cents per barrel.
Marshall’s plan eliminated much of the waste by giving participants a more trustworthy method of regulation that didn’t leave them feeling they were suckers if they complied with their quotas and the law.
Washington’s hot oil resolution then could provide present-day lawmakers a lesson for solving the current hot air debate.
Any plan to mitigate greenhouse-gas emissions, like any approach to controlling oil production, must encompass all participants addressing them in a direct and predictable manner.
U.S. climate policy must keep its accounting simple, in the same manner that Marshall made his tender board certificates straightforward.
Yet, the cap-and-trade program at the center of both the Senate and House climate bills flouts these principles. The complicated offset programs and convoluted emissions registries would create ample opportunity for more hot air, not less.
It all comes back to this: “Humans don’t like to be suckers.” And that goes doubly for American voters. Congress needs to take a page from the hot oil hubbub and implement a climate policy that’s transparent, direct and effective.