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The Political Economy of Pipelines: A Century of Comparative Institutional Development
Published by EH.Net (September 2012)
Jeff D. Makholm, The Political Economy of Pipelines: A Century of Comparative Institutional Development. Chicago: University of Chicago Press, 2012. xii + 270 pp. $60 (hardcover), ISBN: 978-0-226-50210-6.
Reviewed for EH.Net by Christopher J. Castaneda, Department of History, California State University – Sacramento.
Pipelines are an essential yet largely unseen segment of the modern world’s commodity transport system. Typically buried underground, pipelines provide an overland transportation service that cannot be employed nearly as efficiently by railroads, ships or trucks. And while pipelines are basically not much more than buried steel tubes that transport natural gas, oil, water and other products, they have been subject – depending on the product transported – to varying degrees of intensive policy making, regulatory oversight and debate. From the merchant’s perspective, the goal is fairly straightforward: make some money by selling or transporting a product that is delivered via pipeline. But policy makers have sought to shape and guide these financial transactions with different strategies for different pipelines, based on the products transported. In The Political Economy of Pipelines, Jeff D. Makholm, an economist and senior vice president for National Economic Research Associates (NERA) Economic Consulting who has worked with many major oil and gas pipeline systems in the U.S. and internationally, places oil and gas pipeline operations in an economic, political and historic context in order to examine the evolution of competitive pipeline markets.
The Political Economy of Pipelines examines the evolution of pipeline politics and regulation in several countries with a focus on the U.S. experience. The book is organized into nine chapters that analyze the pipeline industry with respect to the new institutional economics, several phases of pipeline regulation, and the competitive potential of the global pipeline industry. The overarching analytical theme of Makholm’s book is “the triumph of latter-day economic institutionalists” (p. 1) in successfully explaining why competition arose in the U.S. pipeline industry. In particular, Makholm’s study is informed by the work of economists Leonard Weiss, Alfred E. Kahn and Oliver E. Williamson. But the immediate theoretical framework is that of Coasian bargaining, the theorem developed by Ronald H. Coase, which emphasizes the control of property rights “as the fulcrum of economic organization” (p. 10) by endowing “a resource with institutional scarcity in order to form the basis for trade….” (p. 11)
After reviewing the range of existing literature on oil and gas pipeline history, politics and economics, Makholm posits that there has not been sufficient economic analysis of the world’s pipeline systems. In chapter three, the author examines the generally accepted claim that pipelines are natural monopolies that require regulatory oversight in order to operate efficiently. Yet, U.S. pipeline firms did compete for licenses (certificates of public convenience and necessity) in order to operate. Ultimately, Makholm suggests that long-distance pipelines cannot be easily defined as natural monopolies. Then, in chapter four he explains how the neoclassical structural analysis of pipelines is also not sufficient for understanding the different types of pipeline regulation in the U.S. and abroad.
Makholm then focuses on the regulatory development of the oil and natural gas pipeline industries in the United States. In 1906, the U.S. Congress passed the Hepburn Act which imposed common carriage regulation on oil pipelines. Standard Oil’s domination of the oil pipeline and petroleum market subsequently led to the 1906 anti-trust suit that resulted in its break-up in 1911. But the political outcry over Standard Oil’s monopolistic practices did not encompass natural gas to the same extent. At that time, however, the gas pipeline industry was barely in its infancy and policy makers, apart even from economic reasons, suggested that imposing common carriage status over the gas pipeline system, such as it was, would hinder its further entrepreneurial development.
The gas pipeline industry did not boom until the 1920s and the use of new welding techniques and seamless steel pipe. By the late 1920s, several long-distance lines were constructed and with reliable long-distance transport possible the industry expanded rapidly. By the mid-1930s after the results of the Federal Trade Commission’s investigation of the public utility industry and subsequent Public Utility Holding Company Act (1935), the Federal Power Commission (FPC) became the regulatory agency that administered the Natural Gas Act (1938) on the interstate gas pipeline industry. Makholm describes how Congress intentionally avoided imposing common carriage status (as the Hepburn Amendment had with oil pipelines in 1906) on gas pipelines by treating them instead as public utilities. Makholm traces this episode through the Phillips decision (1954) that gave the FPC regulatory power over the wellhead price of gas and then the gas shortages of the 1970s and subsequent industry dysfunction. This led ultimately to the Federal Energy Regulatory Commission’s (FERC) restructuring of the gas pipeline industry so that pipelines no longer bought and sold gas but served as open access transporters in a redefined competitive gas market. Makholm then examines the pipeline experience in Canada, the United Kingdom, Australia and Argentina as well as the prospects for developing a competitive gas market in the European Union. He concludes that outside the United States, the prospects for competitive pipeline transport “is thus a question of whether local governing institutions are pushed to evolve to support such competition or are purposely maintained to prevent it.” (p. 186)
The Political Economy of Pipelines provides a valuable perspective on the pipeline industry, and it will be especially useful to policy makers and economists. The book is organized well and clearly written with a focus on the major pipeline regulatory laws in historical context. The narrative is instructive although economists might like to see more quantitative data. The book is particularly useful in its comparison of the U.S. pipeline industry’s transformation into a competitive open-access system with that of international pipeline sectors as they grapple with issues of competitive efficiency versus governmental control.
Christopher J. Castaneda is Professor of History at CSU, Sacramento. His most recent publication is “Natural Disasters in the Making: Fossil Fuels, Humanity, and the Environment,” OAH Magazine of History (2011) 25 (4): 21-25. firstname.lastname@example.org
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