Is prorationing efficiency-enhancing or rent-seeking?: Evidence from a natural experiment

Abstract

Prorationing is used as a textbook definition of a solution to the market failure presented by the common pool aspects of oil and natural gas (see, for example, Spulber, 1989, 59). Yet, at the same time, the academic literature on this question is severely limited. To fill this void, we analyze a recent natural experiment in Oklahoma to determine the impact of rule changes that increased the stringency of prorationing and constrained natural gas production at the well level for one year. Prorationing in Oklahoma no longer serves to address common pool problems, as the affected hydraulically fractured wells do not suffer from common pool problems. Instead, we show that prorationing reduced natural gas production by large companies but had a significantly weaker impact on the production by small companies as well as those headquartered in Oklahoma. This gave the less affected companies an important competitive advantage. These findings are generally consistent with the positions that companies took to advocate for and against prorationing. The regulations can therefore be interpreted as a form of rent-seeking, with their proponents benefitting by imposing production limitations on their rivals. This work stimulates questions about the implications of prorationing in other states.