Producers don't extract and sell as fast as possible as long as their property rights to the resource are assured. Rational producers are always comparing their stock's use value if extracted versus its asset value if left in the ground.

There may still be market failures if resource extraction or use generates environmental externalities (pollution, for example). If resource markets overlook these costs, prices are lower and depletion is faster than socially optimal.

Some governments levy a per-unit severance tax on mineral resources. This shifts MC up, raising current prices and reducing rents, and reducing current consumption. Price grows more slowly than without the tax. Time to depletion is extended.

Resource monopolies conserve more than is socially optimal, by restricting output to drive up price. Resource monopolies involve higher initial prices, lower initial consumption levels and longer depletion schedules than competetive resource markets.

Historic trends in crude oil and natural gas reserves clearly refute depletion forecasts based on static reserve indices.

Tietenberg's discussion of natural gas markets in the US illustrates the dangers of unnecessary regulation of resource markets. Gas is naturally associated with oil. Pricing of interstate piping of gas is regulated under the Natural Gas Act (1938). The Supreme Court in Phillips Petroleum v. Wisconsin extended price controls to gas producers as well, and the Federal Power Commission (FPC) imposed price ceilings for natural gas. This caused serious market distortions.

If maintained to the time of depletion, price ceilings stimulate consumption and also eliminate growth in resource rents, accelerating extraction by resource owners. Depletion happens sooner and abruptly (some of the resource may not be economical to extract under the price ceiling) and the transition to a substitute resource (if its price is not regulated) involves a sudden jump in price. Since price ceilings influence expectations, they distort resource markets even before they become binding.

If there are market expectations that the price ceiling will be lifted, resource owners suddenly have an incentive to withhold until the ceiling is lifted. (This is what caused the shortage of natural gas in the US in 1974-75.) Political interference with markets may in fact cause "overshoot and collapse" outcomes. By trying to "protect" natural gas consumers, Congress actually hurt them. Natural gas price controls weren't entirely eliminated until 1993.

The public views scarcity rents as undeserved profits, and politicians are eager to tax them, but these rents motivate economically efficient resource allocations.

Oil markets have been distorted by both price controls and monopoly pricing by the OPEC (the Organization of Petroleum Exporting Countries) cartel. Pro-Arab OPEC nations embargoed the US as punishment for US support of Israel in the 1973 Arab-Israeli War. US oil prices tripled, but then prices started to decline again and the OPEC cartel's pricing discipline began to disintegrate. Why?

1. Short-run US demand for oil is price inelastic; long-run demand is more price elastic. Conservation strategies and substitute resources took time to develop, but did eventually reduce US dependence on OPEC oil. Demand for oil is also income elastic. The US recession triggered by the OPEC embargo reduced US demand for oil.

2. Non-OPEC oil-exporting nations acted as a "competetive fringe," gradually stealing larger shares of the US oil import market. (Optimal OPEC strategy versus the competetive fringe would have involved giving the fringe a large short-term market share and very high profits, and hanging on until the fringe to exhaust its stocks.) OPEC's market share fell from 50 percent of world oil production in 1979 to only 30 percent of world oil production in 1986.

3. Another source of internal friction within OPEC stemmed from differing production costs among member nations, which made it difficult to agree on prices and allocate production quotas. The low-cost producers have large but slow-growing rents, making them want to accelerate production (which would drive prices down). The the high-cost producers have small but fast-growing rents making them want to restrict production (which would keep prices high or drive them even higher). And both low-cost and high-cost producers want "fair" quota shares of the current market.

As revenues declined, OPEC's pricing discipline evaporated. Many cartel members were unable to resist the temptation to cheat on (sell more than) the production quotas they had agreed to.

How can we protect ourselves against another foreign embargo of a strategic imported resource? We could pursue resource self-sufficiency, which would be very costly. We can stockpile strategic reserves. (The US government's strategic reserve program involved buying oil from oil companies and pumping it into the ground again!) We could induce conservation of domestic reserves by imposing a severance tax which could be eliminated or even replaced with a subsidy for domestic producers in the event of an embargo. (This would be politically unpopular.) We can subsidize development of substitute resources. (Congress spent billions on development of synthetic fuels.) Be wary of misguided tariff and quota policies which may reduce current dependence on imports but increase future dependence.