the race to pump oil at spindletop, texas, 1901- 1902 at around 10:30 a.m. on january 10, 1901, the...
TRANSCRIPT
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.