Posted by: bmeverett | May 26, 2011

Unlocking US Energy Resources

The United States and Canada are now the only countries in the world which allow private ownership of subsoil resources. Private ownership was the key to the rapid and successful development of the US oil industry in the 19th and early 20th centuries. All oil and gas resources on federal land or under federal offshore waters are owned by the federal government and can be accessed by private companies only under contract with the feds. The privately-held onshore areas have been extensively explored, so most of the newly developed oil and gas and most of the potential are now on federal lands. Only about 45% of US oil production still comes from privately-owned mineral rights. As in everything else in the US, the role of the federal government in the oil industry gets bigger and bigger.

The total land area of the United States is about 2.3 billion acres. The federal government owns a little less than 800 million acres or about 35%. The earliest states were able to get land in private hands before the federal government could get their hands on it. Alabama has about 4% federal land. Massachusetts, Georgia and South Carolina each have about 5%. Connecticut has 6%, and Delaware and North Carolina have about 7% each. The federal government kept massive amounts of land in the newer states, however. California is 54% federal land, Wyoming 55%, Utah 70%, Nevada 81% and Alaska 89%. States are the effective owners of offshore rights out to three miles, and the federal government owns all rights between 3 and 200 miles offshore. The offshore area (federal and state) in the US Economic Zone is about 2.8 billion acres.

For a great summary of the history of US property rights, read The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else by the brilliant Peruvian economist Hernando DeSoto. According to DeSoto, American property rights in the 17th and 18th centuries were determined mainly by constructive use. In other words, if a farmer cleared land and grew crops in an area with no established property rights, he gained title to the land. (The local Indians may not have liked this process very much, but that’s a different issue.) After the 1783 Treaty of Paris ceded new territory east of the Mississippi River to the US, the federal government tried to claim title in order to auction off the land for additional revenue. The populace, however, and state and local governments refused to accept federal authority, staying with the “constructive use” concept.

Mining claims were treated the same way. Miners who staked and actually worked a claim gained title to the land and minerals. During the 19th century, however, the federal government finally succeeded in asserting its authority over newly acquired lands in the west.

The political left and the Democratic Party are inclined to believe that any particular activity is better off in government hands than in private hands. Their view is that government is objective, honest, analytical, knowledgeable and interested in the public’s long-term welfare while the private sector is selfish, greedy and short-sighted. Their view is that government “stewards’ while private individuals “pillage” the land and its resources. Therefore, the more land in government hands, the better.

In reality, the government is a very poor steward of public lands. These areas are not being “preserved” in any meaningful sense. There is lots of logging, grazing, oil and gas production and mining on federal lands. It’s just not done very efficiently, and there is the ever-present problem of politically favored groups and individuals obtaining preferential access. Federal land is dramatically underutilized in an economic sense, and our current economic woes dictate that we address this issue.

Anyone who belies that government is a good manager should review the history of the Bureau of Indian Affairs (BIA). According to an 1887 law, the BIA is responsible for managing a trust fund system in which mineral royalties and other income from Indian land are held in trust for tribes and individuals and used to provide essential services. Repeated Congressional oversight hearings have revealed that billions of dollars are missing from the funds and that the Interior Department does not even have sufficient records to account for the money. Nobody can say what mineral royalties have or should have been paid to the BIA, how the money has been invested, its current value or even how much is in the trusts. An auditing firm hired in the early 1990s concluded that documentation was insufficient for an audit. Several Secretaries of the Interior have been held in contempt of Congress for failing to provide information and records regarding these trusts, yet nothing changes. If a private concern behaved this way, people would go to jail.

All assets in the federal government’s hands, whether cash, land, mineral rights or anything else, are used for political benefit. Take, for example, the issue of oil and gas development in the Gulf of Mexico. If these mineral rights were owned by private individuals, they would be developed on an economic basis. More development would occur automatically as oil prices rose and technology improved. The government, however, is sensitive only to politics. As a result, oil development in the Gulf was stopped in its tracks after the Macondo well disaster last year. According to the Energy Information Administration, the average spot price for crude oil in the US has increased from $80 per barrel at the time of the BP accident to just about $100 per barrel today. The government, however, has chosen to restrain US oil production while it tests the political advantage to be gained from increasing or decreasing access to these resources. The chances of much of anything happening in the run-up to the 2012 election are slim. This makes no sense.

Here’s my modest proposal. First, let’s set aside all the land owned by the National Park Service (about 100 million acres) and the US Department of Defense (about 20 million acres). We should also set aside the federal land used by other agencies for their buildings, parking lots, etc, which is a very small amount. Indian land should be deeded immediately to the respective tribes and the horrible process of officially designating tribes and granting them special federal rights should be terminated. The rest of the federal land, roughly 650 million acres, should be put in private hands over the next 10-20 years. Here’s how.

Title to every acre of federal land that has been used constructively by private individuals for at least five years, whether it’s for mining, grazing or logging, should be conveyed to those individuals free of charge. That title should include both surface and mineral rights. The acreage not currently being used constructively should be given back to the American people through a voucher system. Let’s assume that we have 500 million acres not currently used. Every US citizen would get a voucher for 1.67 acres (500 million acres divided by 300 million citizens). These vouchers would convey the surface and mineral rights for unspecified federal land and would be traded freely on a market exchange. Any individual or company could lay claim to a tract of federal land by acquiring sufficient vouchers on the exchange. So if a miner wanted a specific 1,000 acre plot to mine for silver in Nevada, he would simply buy vouchers for 1,000 acres and then stake his claim. Many people would probably sell their vouchers quickly for cash. Others might hold onto them waiting for their price to appreciate.

This proposal is consistent with our early history and would have several healthy effects. First and foremost, the land would be used at its highest economic value. The political left would scream that private owners would destroy the land rather than preserving it. The evidence, however, is entirely to the contrary. People take care of what they own. As the saying goes, “Nobody washes a rental car.” Second, we would no longer have to support the budget of the US Bureau of Land Management ($1 billion) or the US Fish and Wildlife Service ($2.3 billion) with their staffs of 20,000 whose primary work consists of impeding efforts to use the land efficiently.

Offshore acreage would have to be handled differently, since it makes no sense to own surface rights on the ocean. The mineral rights, however, could also be given to the American people through vouchers, with each citizen receiving a voucher for the mineral rights to about 9 acres in the offshore Economic Zone. If ExxonMobil wants to stake a claim on 10,000 acres to explore for oil, they would simply have to acquire vouchers for 10,000 acres and then stake their claim. The federal government could maintain responsibility for environmental and shipping regulations. Oil resources would be developed when a private investor deemed them to be economically viable, not when Congress or the President decided it would be politically advantageous.

We got a lot of things right in the early days of our Republic, not necessarily because we thought them through and reached rational conclusions, but because the feds were too weak to assert their authority over state and local governments. The gradual accretion of power in Washington needs to be stopped at some point. Limiting the federal role as landlord would be a good starting point.


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