The Race to Pump Oil at Spindletop, Texas, 1901-1902

At around 10:30 a.m. on January 10, 1901, the Lucas Gusher blew, starting the mad scramble.

The oil spray could be seen for 10 miles.

 

It took nine days to cap the well.

The Characteristics of Drilling Oil at Spindletop

Ownership of oil was determined by the “Rule of Capture,” which said that the oil belonged to the landowner who captured it.

Spindletop was a huge oil reservoir laying under land owned by many different people.

Drilling many wells into oil reservoirs reduces the pressure in the reservoirs and thereby reduces the total amount of oil that can be retrieved.

1.

2.

3.

The Texas Company

Humble

Drill 2 Wells Drill 1 Well

Drill 2 Wells

Drill 1 Well

$1 million $0.75 million

$1.5 million $1.25 million

Using Game Theory to Model the Decision to Drill

the study of how people behave in strategic situations.

payout matrix

$0.75 million

$1 million

$1.25 million

$1.5 million

If Humble Chooses TX Co’s Best Choice BECAUSE

Drill 2 Wells

Drill 1 Well

The Texas Company

Drill 2 Wells Drill 1 Well

$1

$1

$0.75

$0.75

$1.5

$1.5

$1.25

$1.25

Humble

Drill 2 Wells

Drill 1 Well

If Humble Chooses TX Co’s Best Choice BECAUSE

Drill 2 Wells Drill 2 Wells $1 > $0.75

Drill 1 Well Drill 2 Well $1.5 > $1.25

The Texas Company has a dominant strategy because no matter what Humble chooses to do, its best strategy is to drill 2 wells.

Since the payout matrix is symmetric, Humble has the same dominant strategy.

The Texas Company

Drill 2 Wells Drill 1 Well

$1

$1

$0.75

$0.75

$1.5

$1.5

$1.25

$1.25

Humble

Drill 2 Wells

Drill 1 Well

The Texas Company

Drill Two Wells Drill One Well

$1 million

$1 million

$0.75 million

$0.75 million

$1.5 million

$1.5 million

$1.25 million

$1.25 million

Humble

Drill Two Wells

Drill One Well

Nash Equilibrium: no player has anything to gain by changing only his or her own strategy

Prisoner’s Dilemma: rational choice leads both oil companies to be worse off than if they cooperated.

Both betteroff here

No single producer could save oil for the future since if they didn’t pump it, their neighbors would.

Over the next ten years, the field declined, leaving behind a land stippled with broken or burned derricks.

Rival?Yes No

Yes

No

Excludable?

A rival good can only be consumed by one person. My consuming a cup of Starbucks means that you can’t consume the cup.

A good is excludable if a person can be prevented from consuming it.

Rival?Yes No

Yes

No

Excludable?

A rival good can only be consumed by one person. My consuming a cup of Starbucks means that you can’t consume the cup.

A good is excludable if a person can be prevented from consuming it.

Private Good• Starbucks coffee

Common Resources• Spindletop Oil• 19th Century Whales• Carafe of Wine

Public Goods• Tornado Siren

Natural Monopolies• Online Copy of Mankiw

What’s wrong with this picture?

• Sunset

Buried Danger

Sensitivity: 18-55 lbs of pressure

Angola Civil War, 1975-2002America and Soviet backed different sides~ 500,000 landmines in Angola

Russian Antipersonnel Mine

100 Angolans are killed each year when they accidentally step on land mines.

works using a short-handled shovel near the village of San Antonio in Angola.

“A Job That Concentrates the Mind Wonderfully”

Antonio Cambanda is paid $7 per day as a “deminer” by the Halo Trust, which is based in Scotland. Here, he

Rival?Yes No

Yes

No

Exc

lud

able

?

Private Good

Common Resources Public Goods

Natural Monopolies

A rival good can only be consumed by one person.

A good is excludable if a person can be prevented

from consuming it.

Demined common lands?

What type of good is

• Is it rival in consumption? No. All the villagerscan simultaneously enjoy the greater safety from having common areas cleared of mines.

• Is it excludable? No. Villagers who are unwillingto contribute can still enjoy the increased safety (caveat: maps)

Market FailuresToo little mine clearing of common lands due to the free-rider problem of public goods

Since villagers cannot be excluded from enjoying the benefits of greater safety from clearing minds, villagers may not contribute to paying for demining hoping that others will pay for it.