April 30, 2013


I was having a casual conversation with a friend of mine a few days ago whom suggested that the government should take control of all fracking operations that are currently or will ever be operating within the United States.  I was a little surprised to hear him say this since I knew that he had in the past tended to side with a more conservative view of government.  So I asked how government should do this and for what reason government should do this.  His answer was kind of astonishing to me.
He believed first off that government should enact eminent domain to gain control of all the known sources of oil where fracking was taking place.  He believed that the government should do this for a variety of reason, first off the owners of the land prior to big oil companies coming in were not being justly compensated and were being taken advantage of by the companies that performed the fracking.  Also there are apparently cases in which these fracking companies will find a source they could extract oil from but not actually extract any until the price per barrel reaches a certain level, I found this to be an odd claim in and of itself.
He believed that if the government were to enact eminent domain that the government could then justly compensate the landowners for the oil, which their property contained.  I do not believe that this would be the case at all.  There are several companies that perform fracking, these companies will make more profit if they have more sources of fracking.  So it is to each ones mutual benefit to try and outbid each other for the land up to the point were there is zero economic profit, if one company does not wish to pay a price were there is still economic profit to be made other companies will bid more.  When the government enacts eminent domain it has the force of the government behind it, so it does not need to bid up to the point of zero economic profit as the seller has no choice but to accept the offer.  Also if the government were to bid more than the oil companies who should already be paying the maximum price they can and still turn a profit, then the government would lose money, this money would have to come from taxing some other source.  This alone doesn’t make it a bad idea, necessarily, but I know this is not what my buddy had in mind when he made the suggestion.
The reason my friend was so troubled by the idea that there were known sources of oil which were not being exploited, due to the greed of the oil companies, was because of the prices he and everyone else were paying at the pumps.  He did make an attempt to make an emotionally based argument.  He told me that there were families who worked for minimum wage, and that these families were spending half of their earnings on gas to get back and forth from work.  As a result of gas being such a large expenditure these families could not afford food for their young children, and these children were starving because some oil companies refuse to make a profit if the profit isn’t big enough.  If the government controlled the fracking operations they could flood the market with cheap oil driving down the price.  This story he told me hardly makes any sense at all with my view of the world.
The first question I have is why would an oil company not produce as much oil as it could, as long as it made a profit on it?  This doesn’t fit with the models of micro economics or what I would consider good business sense, especially not in an industry were there are competing firms.  What seems a more likely scenario to me would be that fracking is an expensive way of extracting oil from the earth, as a result the price must be higher to make fracking profitable than is the case with conventional oil drilling.
I also don’t believe that if the government were to take over fracking and increase the supply of oil that we would see much long-term change in the price paid for fuel at the pumps.  As gasoline has increased in price over time, we have seen a change in people’s preferences in regards to its use.  People use to buy big “gas guzzling” cars, there has been a shift to more and more people buying more fuel-efficient cars.  There have also been other changes, but the point is that people have changed their preferences to consume less fuel.  If the market were to be flooded with oil, prices may decrease initially, but this would eventually be offset by people adapting to the new lower prices and demanding more gasoline, which would drive the price per gallon up once again.
Besides the fact that I don’t believe that government could ever run a business enterprise very successfully, for reasons that may take a great many pages to explain, the story my friend told me doesn’t make sense.  The motives the fracking companies sees in his story don’t fit with what I expect to see in real life.  Likewise the result of a government take over of fracking doesn’t seem to fit with what I expect to see in the real world.  He seems to be concerned with poor families, in a particular children of poor families, and has some how managed to link this issue with fracking.  I think it is thinking like this that drives a lot of public policies that result in government control in a sector that should be left up to the market process.

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