An Equilibrium Theory of Proration

Any mechanism, either natural or artificial, for regulating the functioningof a given unit in the general economy must operate toward the maintenance ofequilibrium if it is to survive. The petroleum industry, concerned as it iswith the production of a natural resource of specialized character, issurrounded not only by the economic factors common to other industries but byan extra set of unique elements centering about the fugitive character of crudepetroleum under conditions of competitive development. The term equilibrium, therefore, so far as the oil business is concerned, involves a combination ofeconomic and physical factors: the first set having to do with supply, demand, costs, profit margins, purchasing power, and the like; and the second, withunderground pressures in oil pools, efficient rates of extraction, and allother aspects of engineering that may be summarized by the familiar term"conservation." The two categories, in fact, are not as clearly dividedas the foregoing statement would imply, for in practice it will be found thatthe economic and physical aspects have a pervasive interaction andinterrelationship. If the development of the petroleum industry in the United States isexamined from its inception in 1859 down to the present, it will be found that, beginning about 11 years ago, a new mechanism for regulating the production ofcrude petroleum made its appearance. Prior to this recent period, theproduction of this raw material was determined by competitive forces operatingwithout outside restraints. At present the output of crude oil is subjected tosupervision by regulatory bodies in most of the oil-producing states, whichimpose upon the operators certain conditions having to do with the manner andrates of production. Thus, in the space of a decade, the mechanism forproducing crude oil has changed from an automatic to a designed procedurecalled proration. And in its short history this method has been marked by arapid evolution in its nature and incidence, with progressive changes stillunder way. T.P. 904