The protests against the Dakota Access Pipeline (DAPL) have been enormous, and the police have responded with a total of almost 500 arrests to date.

Can we use prices to figure out if the protesters here are right? Should we be investing in green energy sources instead? Is DAPL’s cost to the Standing Rock Sioux too high?

Prices vs “Peak Oil”

One great benefit of markets is that prices tell us what to do. Not through orders, which often don’t work, but through incentives. If I have something that someone else values more than I do, I can sell that thing, and we are both better off.

The exploration, production, use, and transport of oil and gas via projects like the Dakota Access Pipeline are all governed by prices. When there were worries about “peak oil,” many analysts predicted disastrous shortages and hardships. They forgot the power of prices, though: when price goes up, three things always happen.

  1. Consumers find ways to use less
  2. Producers find ways to make more
  3. Entrepreneurs find ways to create substitutes

When prices of crude oil rose above $120 per barrel in the mid-2000s, all three of these things happened. Oddly, many people in government decided that we needed to subsidize “green” or alternative energy, when in fact high prices alone were already telling us to do #3.

The problem for green energy has turned out to be #2: producers make more. High crude prices spurred a worldwide revolution in the exploration and development of “shale” oil resources and “sand” fields that contain truly gigantic amounts of oil and gas. The Dakota Access Pipeline promises to bring oil from one of these new fields to refineries where it can be made useful for consumers.

Projects like DAPL have meant that the U.S. became a net energy exporter by 2012. So much for “peak oil;” markets can fix this.

DAPL and Externalities: The Problem with Prices

The problem with prices is that they do not always reflect the full costs of an action. One of the best-known examples is cases of “externality,” when there are costs (or in some cases benefits) imposed on others. If prices do not reflect the full cost of the resource, as in the case of pollution from cars and coal power plants, and the need to maintain huge armies in the Middle East to protect access, then consumers will use too much of the resource, given its value.

We need to “get prices right” to ensure that the way we use oil and gas both encourages the correct level of development of hydrocarbons and discourages their use when that would be harmful.

So you may not find the “prices cause more use of petroleum products!” argument above to be a success story. Prices have done their work, but have we gotten prices right? There are reasons to wonder. And if we have not “gotten prices right” then all my optimism above may be misplaced.

Part of the problem with prices for DAPL has to do with the aforementioned externalities. But another part has to do with Native American property rights and eminent domain.

Native American Property Rights

I find it surprising, and bit disturbing, that a lot of pro-market, pro-property-rights folks are so cavalier in dismissing the treaty obligations of the US to respect the sovereign territory of aboriginal Americans. Several Native American groups were ceded very specifically described territories in the Ft. Laramie Treaty of 1851. One of these groups were the Sioux, including the Lakota who now live in the Standing Rock Reservation in North Dakota.

Now, it’s true that the US reneged on its obligations under that treaty, even though the treaty was never formally cancelled. And it’s also true that the US offered a pittance as “compensation,” though the Lakota never accepted the money or agreed to give up their claim on the land.

Much of the land being used for the pipeline near the reservation is “federal,” but only in the sense that the government ignored the 1851 treaty and retained the land. The pipeline route does skirt the federally recognized reservation boundaries, but passes directly through several sacred sites, some of which have already been preemptively bulldozed. But a court has said that the Standing Rock Sioux cannot block construction.

The current objections being made by the Lakota and other groups to DAPL are partly based on the disruption of sacred sites, and partly a concern for the safety of water supplies.

You could say that this is simply an instance where eminent domain can be used, but that’s not exactly right. This is a privately financed and built pipeline; it’s not a state road project. The company building the pipeline, Energy Transfer Partners, is asking for a permanent pipeline easement 50 feet wide, and a temporary construction easement of up to 100 feet on agricultural land. These should be privately negotiated.

How are we to value peoples’ rights to withhold their consent to have the land used in ways they oppose? What is the correct “price” for such considerations? How far can we press the logic of Kelo v. New London in expanding the notion of “public purpose”?

Markets can’t answer this question; it’s a property rights problem. If property rights are not clearly specified, markets fail. That may not be the fault of markets per se, and rather reflect government failure, but it’s a failure nonetheless. How can we “get prices right”?

More generally, how are we to adjudicate disputes about the prices for DAPL? Eminent domain always suppresses the price mechanism, and substitutes coercion and “expertise.” The reason that prices give accurate information about scarcity is that markets aggregate many pieces of information from dispersed sources.

No expert could possibly substitute his or her judgment for that process. The subjective value of the use of land, in the form of the price owners are willing to charge to sell or rent use of the land, is (or should be) a key element of the decision whether, and where, to build the pipeline.

Conclusion

All of this raises an important question: do the economic facts on the ground tell us that DAPL should be built? I’m afraid I don’t know. The more I learn, the less sure I am of the answer. Still, if we can move our debates in that direction of getting prices right, at least we will be asking the right questions.