Who should be able to bid for oil and gas leases on federal land?

Michael Giberson

At PERC Reports, Shawn Regan argues that rules preventing direct participation by environmentalists in federal land lease auctions leaves few options available to such groups other than lobbying for political protection (or worse):

Under current federal leasing rules, leases cannot be held by environmental groups for non-consumptive use. Even if they are the highest bidders, rules require that leaseholders must develop their parcels, precluding such groups from holding them for habitat protection or recreational use. In 1996, an environmental group that submitted the highest bid for a 275-acre timber allotment in Okanogan National Forest in Washington was disqualified because the group did not plan to cut any trees. Politically powerful ranching, timber, and oil interests have kept the bidding process free of competition from environmental groups, thereby keeping leases at below-market levels.

Left out of the commodity leasing and sale options, environmentalists have turned not only to “monkey-wrenching,” but to the political system as a means to set aside land for preservation. This method has largely been successful for environmental groups, who spend millions each year lobbying the government to set aside land into the public domain. Since 1960, over 35 million acres have been added to the federal estate, which is the equivalent of adding an area greater than the size of Rhode Island each year. However, the political allocation of protected lands is made with little regard to the opportunities foregone of alternative uses of the land. By contrast, in a truly competitive bidding process, where environmental groups can bid alongside the oil and gas industry, the winners must face the tradeoffs associated with drilling or preserving the land.

One of the troubles with relying on political allocation is that it encourages expansive rhetoric about the fragility of the ecosystem and how every acre is sacred.  Relying on competitive market allocation encourages consideration of how the ecosystem works, which parcels are particularly important for their low-impact recreation or non-use values, and how much these things are worth.

Maybe you think this idea is pie-in-the-sky dreaming. Think again:

Some states have experimented with allowing environmental groups to bid on state land leases. In 1996, the Forest Guardians outbid a rancher for 644 acres of damaged riparian habitat in New Mexico. The area is now held for nongrazing use, which has restored the watershed’s sensitive ecosystem. Since then, Arizona and Montana have begun to allow private owners and nonprofit groups to bid on state grazing allotments for alternative uses such as nature or recreational leases and other forms of joint land management. In 1999, a coalition of environmental groups and private individuals bought the right not to harvest timber on 25,000 acres of Loomis State Forest in Washington. A remarkable $16.5 million was raised in just one year by more than 5,000 people to protect the forest in the equivalent of a conservation easement, which will remain entirely roadless and serve as important habitat for grizzly bears, fishers, and the Canadian lynx.

Regan said, “By inviting private owners and nonprofit groups into the bidding process, competition could promote cooperation between environmentalists and the oil industry.”  That seems like a great idea for the right combination of people.

A oil and gas developer and environmental group willing to work together could pool resources and bid as a team to get what they wanted from a parcel: the oil and gas developer pursues the petroleum in a way that satisfies the environmental group’s interest in protecting the rest of the value of the land. The contract laying out mutual obligations of the two partners could be drawn up in advance and made contingent on success in the auction.  If the team wins, the contract is in place to manage the cooperation.

Obviously not all environmental groups (or all oil companies) would be suitable for such partnerships. A group philosophically opposed to the use of fossil fuels won’t be able to find common ground with a developer, and some oil companies may be unwilling to change their operating methods to accommodate the interests of potential environmental group partners.  That’s fine.  Especially in cases in which there are potentially significant mineral resources and significant environmental values in the same location, a team of bidders that aimed to get the most value from both kinds of resources should be able to outbid competitors that only value the parcel for one part of its resource.

Of course, if this team-bidding is such a great idea, why isn’t it already happening? Unlike a pure environmental-group bid that would be proscribed by rules requiring development of the oil and gas resources, a mixed team as suggested would be planning to develop the oil and gas. Such bids should already be permitted, but we don’t see them.  Why? Here are some ideas: (A) environmental groups find a better return-on-investment from political lobbying, or (B) maybe existing regulations preserve enough of the environmental value that the marginal improvement possible, from the point of view of the environmental group, isn’t worth the cost, or (C) oil and gas companies judge the added expense is not worth the cost of cooperation, or (D) environmental groups and the oil and gas industry just don’t trust each other enough to contract together.

But whether or not enviro-oilco teams would bid, it is still a good idea to open up the lease auctions to a broader range of competition.

Crabs and crabbers: “Interests are not always aligned”

Michael Giberson

I laughed at this line in an article in the Washington Post:

But one survives by catching the other and selling it to be eaten. So, as economists say, their interests are not always aligned.

The article discusses the Maryland state government’s attempt to reduce the number of “limited crab catcher” licenses in order to better manage the fishery (crabbery?). They sent out letters to all 3,676 license holders asking them to, in effect, name their price, with the state planning to buy back the cheapest 2,000 of the offers.  Is it obvious that economists were behind this idea?

Unfortunately, fewer than 500 offers were submitted in return and many of them were much higher than what the state was willing to pay. In response:

Maryland officials have … gone to a more old-fashioned approach: the carrot and stick. They’re offering the 3,676 small-time watermen a fixed price, $2,260, for their licenses.

Those who don’t accept the offer and haven’t caught crabs in five years might face an uncomfortable choice. If they want to keep their licenses active, they might have to agree not to pass them on to future generations of their family.

The newspaper article is a little sketchy on various details that matter. If the original proposal was to buy the licenses offered at the offered price, this method could have been part of their problem.  Most respondents probably had only vague ideas about how much the state would be willing to pay, and so they were unsure how much to offer.  Would you want to be the sucker who sold an unused license back to the state for $1000 if a neighbor was paid $5000?  Perhaps better to not participate, or name an arbitrarily high price.

An iterative approach that provided some feedback to participants might have worked much better.  For example, in 2001 Georgia used an “iterative discriminatory auction” process in which they asked for offers from farmers (to forgo use of irrigation permits for the rest of the year), the state responds by telling farmers which offers would have been accepted that round.  Farmers can then resubmit offers, and the auction repeats until no one submits a new offer (or the state calls an end).  This process provides feedback enabling price discovery.  While they “paid as offered” (I think the law required this approach), because of the feedback in the auction process, no one was unduly surprised by the offer prices that were accepted.

Despite Maryland’s experience, Virginia officials are trying a reverse auction of their own. Their offer went to all 1,800 of the state’s licensed crabbers, big-time and small: Name your price. Bids are due Nov. 1.

Any bets on the likely success of Virginia’s program?

(HT Market Design: What if they ran an auction and nobody came?)

Auctions as tools to limit government discretion

Michael Giberson

Auctions, especially auctions of government property, are not a tool of the rich…  As principles of market design become more thoroughly articulated and widely understood, the sphere of governmental discretion will shrink. More and more, politicians will be forced to play by the rules.

That’s David Warsh writing on the relationship between the economics of auctions and government. His main point is that when government property (anything from radio spectrum licenses to surplus office furniture) is sold by auction rather than disposed of in other ways, the tendency is for rules to limit discretion. Lobbying and personal relationships become less important, and cash deposited into government accounts becomes more important.

It might be objected that the current lobbying frenzy occasioned by the Waxman-Markey carbon emission cap-and-trade bill is a counter example. For example, from the New York Times:

Cap and trade, by contrast, is almost perfectly designed for the buying and selling of political support through the granting of valuable emissions permits to favor specific industries and even specific Congressional districts. That is precisely what is taking place now in the House Energy and Commerce Committee….

Yes, a lot of lobbying is going on. Regulation of carbon emissions will occasion a substantial increase in the influence of the government over the economy, and the consequences of that potential regulation provide significant motivation for firms to invest in lobbying.

But observe carefully, this isn’t a case in which auction tools enhance the granting of political favors. Instead it is an example of how, if you want an advantage in an auction system, your best bet is to get your advantage placed in the rules in writing up front. No CEO is saying to his board, “Don’t worry, I went to school with the guy at the EPA (or DOE or wherever) who will be in charge of the auction; he owes me a few favors, he’ll take care of us.” Instead, they are lobbying like crazy.

When the rules are in place (and the subsequent narrower lobbying over the implementing regulations, and the subsequent lawsuits roll through the courts), the ability of wealth to buy political favors will be constrained.

Administration abandons airport landing slot auction

Michael Giberson

From the New York Times City Room, “U.S. Won’t Auction Airport Landing Slots“:

The United States Department of Transportation has canceled a plan to auction landing slots at New York City’s three airports, officials announced on Wednesday, bringing an end to a widely criticized effort by the Bush administration to use market incentives to reduce congestion and delays.

“We’re still serious about tackling aviation congestion in the New York region,” Transportation Secretary Ray LaHood said in Manhattan on Wednesday in remarks to the Association for a Better New York. “I’ll be talking with airline, airport and consumer stakeholders, as well as elected officials, over the summer about the best ways to move forward.” [Links in original.]

An auction would let prices help clear demand for landing slots, and would therefore reduce congestion into and out of the three New York airports that were targeted by the proposal. The administration, by avoiding auctions, chooses to continue to clear the market by making people wait instead. Since some of that waiting is done by people flying around in large jets, burning jet fuel and emitting stuff, there are environmental consequences to the administration’s status quo approach.

Just saying.

(HT to Sandy Ikeda)

One aspect of auction design that may need greater attention

Michael Giberson

Al Roth at Market Design, once again commenting on bidding in auctions while not intending to pay as a form of protest. (Earlier he posted on a similar tactic in an BLM oil and gas lease auction; here was my earlier post on his earlier post.)  Roth cites the New York Times: article one, article two.  A story on the same topic appeared in the Wall Street Journal.

The very practical “market design” concern is how the auction manager can prevent such protest bids, short of, say, requiring everyone to pay their million dollar bids in cash before they leave the room.

Or, as Roth put it, “One aspect of auction design that may need greater attention if these kinds of disruptions become commonplace is how to qualify and verify bidders and winners, and notify other bidders in the event that winners default, so that auctions can be made more resistant to attack by fake bidders.”

Apparently auctioner Christie’s policy allows the seller to request that Christie’s attempt to directly negotiate a sale to the party submitting the next highest bid in these cases.  However, in this case the seller has indicated he would retain the property if the winning bidder will not pay.