An Equilibrium Theory of Proration

ANY mechanism, either natural or artificial, for regulating the func-tioning of a given unit in the general economy must operate toward the maintenance of equilibrium if it is to survive. The petroleum industry, concerned as it is with the production of a natural resource of specialized character, is surrounded not only by the economic factors common to other industries but by an extra set of unique elements centering about the fugitive character of crude petroleum under conditions of competitive development. The term equilibrium, therefore, so far as the oil business concerned, involves a combination of economic and physical factors: the first set having to do with supply, demand, costs, profit margins, purchasing power, and the like; and the second, with underground pres-sures in oil pools, efficient rates of extraction, and all other aspects of engineering that may be summarized by the familiar term "conserva-tion." The two categories, in fact, are not as clearly divided as the foregoing statement would imply, for in practice it will be found that the economic and physical aspects have a pervasive interaction and interrelationship. If the development of the petroleum industry in the United States is examined 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 of crude petroleum made its appearance. Prior to this recent period, the production of this raw material was determined by competitive forces operating without outside restraints. At present the output of crude oil is subjected to supervision by regulatory bodies in most of the oil-producing states, which impose upon the operators certain conditions having to do with the manner and rates of production. Thus, in the space of a decade, the mechanism for producing crude oil has changed from an automatic to a designed procedure called proration. And in its short history this method has been marked by a rapid evolution in its nature and incidence, with progressive changes still under way.