ABSTRACT
The domestic crude oil industry has been the object of much legislation and presently operates under (a) state production restrictions (prorationing), (b) federal controls (the Connally Hot Oil Act prohibits interstate commerce in oil and oil products that have been produced in violation of state prorationing laws), and (c) special tax considerations (percentage depletion). Prorationing and the Connally Act are expressions of a public policy which has emerged because the free competitive market has been unable to perform its primary function of husbanding existing oil reserves; while percentage depletion is often justified by arguing that in the absence of this tax provision, the free market would not allocate sufficient resources to exploration for new oil reserves.
