Efficiency as Undetermined Allocation: On a "Just" Privatization of U.S. Offshore Resources.

• Author: Bratland, John C.

For the moment, assume that efficiency may be an impetus in privatizing U.S. (federal) offshore land resources. (1) But what does "efficiency" mean in considering privatization of these resources? What approach to privatization would achieve efficiency as appropriately defined? In considering these questions and the need for privatization, one notes that these lands are allocated through a complex, rigid, and largely outmoded leasing system that restricts enterprises to tightly regulated exploration and development of in situ resources. (2) Historically, strict regulatory control has been a principal policy concern, whereas efficiency has, at best, been seen as a matter of assuring statutory and regulatory compliance. One consequence of this approach to policy is that the issue of alternative or conflicting uses of these lands has never been addressed in a nonpolitical way. Understandably, anxiety over these conflicting uses has no doubt been a strong motivation for keeping these resources under strict federal control. This conflict hinges on the fact that offshore resources would include but not be limited to oil and gas resources but would also include the environmental amenities that in the eyes of some may be threatened or diminished by petroleum development. The federal government has dealt with these potential allocative tradeoffs by succumbing to the pressures imposed by free-riding political constituencies with the power to foreclose alternative use. In an important sense, inefficiency is fostered by an allocative process in which the opportunity cost of foreclosed use can never become the requisite and decisive factor in determining alternative uses of these resources. (3)

But a nonpolitical solution to this trade-off issue suggests privatization and clear understanding of what private property means. Once true privatization of a resource were achieved, owners would be able to exercise secure allocative rights of control, use, and unimpeded transfer. Richard Epstein is emphatic in stating that these rights represent an inseparable unity, meaning that property rights do not exist if any of these rights are infringed (1985, 57-62). The exercise of each of these rights by any owner involves an opportunity cost that would be reflected in the owner's most highly valued alternative use being forsaken in committing to a particular course of action (Buchanan 1969, 38-69; Thirlby [1953] 1981,201-43). If ownership resides in the individual, "efficiency emerges from, and indeed is defined by, the separate decisions of owner-users who confront opportunity costs that reflect [in their own judgment] the full value of sacrificed alternatives" (Buchanan 2000, 290-91, emphasis added). Properly understood, Buchanan's definition of efficiency obviously suggests an undetermined resource allocation. However, common definitions of economic efficiency seem to point to a determined allocation of resources in that they assume the existence and availability of information that does not exist if resources are privately owned. In the real world, efficient allocation means that at any given moment in time, the identity of resource owners is subject to change as is the case with objectives sought by owners. Private ownership necessarily means that the process of resource allocation is stubbornly undetermined. Allocation necessarily involves subjective choice as well as owners' and prospective owners' evolving preferences. (4) Ex ante resource allocation is fundamentally indeterminate given the reality that expanding the legal scope of action alters the range of actions from which the actor may choose. The essence of this allocative indeterminacy is seen in the observation that "[t]he central issue is the critical interdependence between the market choice itself and the informational content of the process, which can only be revealed as the process is allowed to occur" (Buchanan 1979, 86, emphasis added).

But how should privatization be defined and achieved? In answering this question, one must first note the nature of nationalization. Nationalization of offshore lands was imposed through the passage of two federal statutes in 1953, the submerged Lands Act and the outer continental shelf Lands Act, discussed in the next section. The jurisprudence of nationalization has the effect of preempting the private action required to achieve just private ownership of in situ resources. Hence, nationalization, as it is commonly implemented, simply means that a government has employed coercive means to declare and acquire free control of resources. But one must then question the ethical scope of this control as it may apply to the acquisition of property rights for in situ resources. Although a sovereign can declare coercive control over an "unowned" area, these actions by the government involve no acts that achieve ethical "just holdings" of resources. Epstein notes that legitimate property rights "are not grounded in the commands of the state ... and do not come without an expenditure of resources, and their expenditure makes clear the exclusivity of ownership" (1985, 61, emphasis added). Epstein's observation on ethical and legitimate ownership is firmly grounded in the natural-rights jurisprudence and not in any presumed power that may be exercised by government (1985, 10). (5)

The case study in this paper highlights a contrast between resource allocation under the status quo and the allocation that could emerge if U.S. offshore in situ resources were to become privately owned. Publicly owned resources such as U.S. offshore lands are currently allocated through proscription and prescription in the form of statutes and regulations that are essentially aimed at constricting the scope of action-availed enterprises operating on these lands. But the consequences of expanding the scope of action-availed owners must be examined in a way that acknowledges the autonomy and legitimacy of the choices that may be made by actors at a particular moment in time. Owners' ex ante adaptive actions would be aimed at attaining their most highly ranked subjectively chosen ends with respect to the use of their property. But "potential [market] participants do not know until they enter the process [as owners] what their own choices will be.... [I]t is logically impossible for an omniscient designer to know [their choices], unless, of course, we are to preclude individual freedom of will" (Buchanan 1982, 5-6, emphasis in original). Moreover, allocative intentions are never static, just as the ownership itself is subject to change. No specific alternative pattern of owner action can be assumed once private ownership is acquired.

Efficiency is not discernable empirically because efficient allocation is undetermined in an ex ante sense. This analysis explores the nature of an allocative process that addresses the dual issues of conservation of extractive resources and quests related to environmental concerns.

Genesis of the Problem: Nationalization of U.S. Offshore Lands

The move toward nationalization was undertaken against a historical backdrop in which many embraced the political presumption that the greatest benefit to the public would be assured by governmental management of natural resources. (6) The origins of the allocative chaos characterizing the exploitation of U.S. offshore resources had its origins in the fact that "the private property tradition of the United States had never applied to coastal waters and the land beneath them" (Bradley 1996, 282, citing Bartley 1953, 7-29). Nationalization was arguably only a declaration of political control but did not in itself establish any legitimate ownership by the "public." Rather, nationalization only made official the declaration of coercive control over the use of U.S. offshore lands. Moreover, attitudes toward nationalization of U.S. offshore resources may have been conditioned in part by the long-standing political concerns raised by the larger corporations within the petroleum industry (Armentano 1990, 55-80). The assumed need for governmental control and the negative view of the petroleum industry fostered a climate in which the regulation of offshore lessees was viewed as an unquestioned source of net public benefit. However, in practice, the resulting regulatory philosophy of control was and is based on the implicit notion that if the government is able to mandate compliance with some ostensibly popular regulatory stricture, then somehow a social benefit must accrue to the public. Conversely, any relaxation of regulatory sanctions would somehow mean a diminution of any benefit that may be enjoyed by the voting public. In a strange way, this zero-sum presumption has remained a tacit operative assumption for offshore leasing and regulatory policy on the outer Continental Shelf.

Nationalization was made a formal reality in 1953 by the passage of the Submerged Lands Act and the Outer Continental Shelf Lands Act (OCSLA) (Bradley 1996, 282-83). The affected lands comprise 1.7 billion acres off the Alaskan coast, Pacific Coast, Gulf of Mexico, and the Atlantic Coast. These lands have been "managed" under the amended OCSLA to assure "expeditious and orderly development [of Outer Continental Shelf resources], subject to environmental safeguards, in a manner which is consistent with the maintenance of competition and other national needs" (43 U.S.C. [section]1332(3)). Expeditious development has meant that leases have been issued under highly abbreviated lease terms of five or ten years. The misguided assumption that expedited development can be considered orderly in uncertain markets should be noted immediately. Experience has shown that expedited development has generally meant chaos because of the forced expediting of lessee operations and in many cases the requisite relinquishment of lease holdings. (7) The tendency toward allocative chaos is further reflected in the reality that the...