Draining Across Borders: How Common Pools Fuel Inequality

Abstract

We study drainage of First Nations' oil in Western Canada. Many oil pools underlie land straddling the borders of First Nations reserves, creating a common pool problem. Ownership is determined based on the location of the well that brings the oil to the surface, regardless of where the oil originated in the subsurface. We show how heterogeneity in costs exacerbates inequality: (i) lower-cost off-reserve wells located in close proximity to reserve borders drain First Nations oil; (ii) in response, wells on First Nations reserves extract at a faster pace than optimal. We discuss two mechanisms through which First Nations could have been compensated for the lost revenue and find neither was pursued.