‘Forced Pooling’ Bad Idea Economically, Ethically

April 8, 2015
By Pat McGeehan , Shale Play

In the wake of West Virginia's 2015 legislative session, much media attention has been given to the policy known as "forced pooling," a policy promoted by the largest and most politically connected companies in the oil and gas industry. Though I am very supportive of oil and gas development, I strongly oppose this particular policy. Many like-minded colleagues, from both political parties, worked with me to garner enough votes to ensure its defeat in the final hours of the regular session this past month.

Since the bill's demise, chatter in the press from legislators who support the policy -including the Senate president and speaker of the House - wraps around vague rhetoric of "job creation." Since this overt reason is no doubt why the forced pooling bill was supported so robustly by many in leadership positions, it is worthwhile to closely examine their claim. In so doing, we can uncover why the assertion that forced pooling "creates jobs" is both an economic fallacy and a colossal violation of an individual's natural claim to private property.

Forced pooling - suddenly renamed with the Orwellian labels of "fair pooling" or "lease integration" - is a concept which runs diametrically opposed to the American traditions of private property and free markets. Under easily attainable conditions set forth in the bill, the law would transfer to certain natural gas drilling companies the extreme power of government compulsion. With this radical new-found power, any individual owning a deed to mineral rights could be forced to lease those rights, so long as the drilling outfit involved is able to sign up a few others around them. After being coerced to sell or lease, the price one would receive would then be arbitrarily fixed by a government commission, not the free market.

Under the golden dome in our Capitol, corporate lobbyists gave arguments that were all over the board, filling the heads of delegates and senators with many distractions. "Well, some people just won't lease us their property rights, and we can't have people standing in the way of our operations." Or, "Well, sometimes we just can't locate the property owners to bargain and negotiate with them. We need this power to overcome this inconvenience." And of course, "By the way, did I tell you this will create jobs?"

All these reasons, as convincing as some elected officials may have found them, were mere diversions from the heart of what was at stake.

At the core of the 68-page bill - which yes, I required to be read aloud, in its entirety on the House floor - lies this premise: Government could utilize force to take what rightfully belongs to one person and hand it over to someone else, all against the rightful owner's free will. Forget the rest, because this was what was truly desired. And why not? Sounds like a good deal - if you are the one bestowed with raw government power. But, if you are a farmer who owns the mineral rights to your family's 50 acres of land, you might not think so. This is the moral reason why forced pooling is a detrimental policy to enact in West Virginia, the state whose motto is "Mountaineers Are Always Free." But as mentioned, it is also bad economics.

A concept called time preference explains why this policy is economically unsound. Time preference is an individual's choice to consume now or to wait, thus potentially consuming more in the future. For instance, a person who wishes to save most of his income, abstaining from consuming all of it now, has a lower time preference than one who receives his paycheck - and then immediately spends it all at the shopping mall.

It is easy to apply time preference to mineral ownership and natural gas operations. We can see that some people may want to lease their mineral rights to a gas drilling company now, even though market prices for leasing their minerals are relatively low. These individuals may want to take a lesser amount of cash in the present - in spite of the possibility that if they save their mineral rights, they may receive a larger return if market prices rise in the future.

Make no mistake, nothing is wrong with this option. Some people may need the money, while others may simply not want to risk the wait. However, others, who have a lower time preference, and are typically referred to as "savers," may want to wait before they sell or lease. Forecasting that prices will rise in the future, these savers postpone immediate consumption, in order to receive a higher return for their mineral and property rights down the line. Over the course of time, savers often indirectly lift standard lease values for everyone involved.

This is the "seen" and the "unseen" of economics. Advocates of forced pooling see only the immediate, short-term potential benefits - that if they use the government to force people to sell now, jobs will be created now. The long-term consequences, however, go unseen. Forcing the rest of our state's drilling population to sell now, at lower prices, will forego the large amounts of income our residents will likely receive in the future, potentially costing West Virginia citizens billions of dollars in lost opportunity over the coming decades.

Of course, politically-connected gas companies greatly desire this outcome. At the expense of those individuals who wish to wait, forced pooling awards these corporations with government power, in order to escape the natural rules of the market. No longer would these insider companies have to voluntarily negotiate a fair, market price with all property owners. The government would essentially waive the time and capital these natural gas businesses would otherwise have to set aside in the future, to offer higher prices to West Virginia residents for their mineral rights. In other words, under forced pooling, market forces are dismantled and replaced by a small board of government power players.

In essence, this flawed policy coerces massive amounts of individual West Virginians to enter leases now for artificially lower prices, thereby transferring wealth from the next generation into the hands of favored oil and gas companies.

Government reallocation of wealth and resources does not "create jobs." Unless one considers the man who robs a bank and uses the loot to start-up his own business a "job creator," all this policy does is provide the illusion of short-term economic growth. In the long run, the most effective method of ensuring that this bountiful resource benefits our state's citizens the most is to protect private property.

In recent years, too much has been taken from our children and grandchildren already. Forced pooling would be very damaging to West Virginia. In spite of this, I am sure many politicians will resurrect this bad idea. Some will have less than noble intentions, while others will have good (but misguided) ones. James Madison said it best: "All men having power, ought to be mistrusted."

Pat McGeehan represents the 1st District of Hancock and northern Brooke Counties in the West Virginia House of Delegates. A graduate of the U.S. Air Force Academy, he is the author of "Printing Our Way to Poverty-The Consequences of American Inflation." His newest book, "Liberty and the Christ: Why Christians Should Embrace Political Freedom," is due out this spring. He can be reached by email at pat.mcgeehan@wvhouse.gov.

 
 

 

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