East Texas Oil Field and Oil Price Regulation

After visiting the Bullock museum, I’d have to admit that I agree with some of the previous bloggers in that I wasn’t super impressed either. My impression has also been colored by the fact that I have been reading the Prize (although I’m only through page 300 – I keep getting distracted with other books/assignments). The Prize is an excellent collection of oil history from the beginnings of oil industry in the 1850s to present day (copy write 1991).

One of the parts of the oil exhibit in the Bullock is the east Texas field that was discovered/developed in part by Marion ‘Dad’ Joiner. This field discovery was enormous – oil prices fell from above a dollar a barrel to 15 cents per barrel (based on information in the Prize). The effect of vast increases in production were wreaking havoc on the oil industry – many companies were unprofitable based on the low price of oil (cost of production was higher than the cost of the oil product). This is a major reason that the Texas Railroad Commission was put in charge of regulating oil production (to stabilize prices). Oil had already become a global commodity at this point in time and the east Texas field was having global implications on the oil market.

This brings me to something that I’ve been thinking about after learning about the Texas Railroad Commission in class and in reading about it in the Prize. Since we live in a country that has mostly capital markets, cases where a government body steps in and sets prices (for oil in this case) seem misguided. I would tend to think that markets work best when they are allowed to operate freely – price and supply will automatically stabilize based on demand and the market dynamics. We know what happened in the 1970s when the US government put a ceiling on gas prices – supply shrank and folks waited for hours to get gas as the United State experienced a gasoline shortage. However, we have experienced times when deregulation hasn’t gone as well as planned. California provides a good example of this when electricity was deregulated (although there were mitigating factors that exacerbated problems during the summer of 2000 and 2001). Any thoughts on government price controls of commodities (such as oil)?