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Political constraints on government cartelization: the case of oil production regulation in Texas and Saudi Arabia

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  • Gary Libecap
  • James L. Smith

Abstract

We examine government cartelization efforts in crude oil production. Texas and Saudi Arabia are alleged to act as swing producers to maintain the interstate (1933-1972) and OPEC (1973 on) oil cartels respectively. We analyze the political constraints that affected the ability of Texas and Saudi Arabia to act as residual producers within their respective cartels. In the case of Texas, political factors molded individual firm production quotas, advantaging high-cost producers and hence, reducing total cartel net profits. Further, Texas had limited range for adjusting total state production to maintain interstate output at levels consistent with target prices. Saudi Arabia’s role as swing producer within OPEC raises similar questions regarding how cartel output is shared among members, and the extent to which domestic economic and political pressures coming from various member countries may undermine the effectiveness of the cartel. OPEC ‘s coordination problem has been more difficult than that faced by the interstate cartel for a variety of reasons that we explore. Even so, they have not kept the OPEC members in general, and Saudi Arabia in particular, from exerting a strong influence on the level of world oil prices.

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Bibliographic Info

Paper provided by ICER - International Centre for Economic Research in its series ICER Working Papers with number 16-2001.

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Length: 45 pages
Date of creation: Jun 2001
Date of revision:
Handle: RePEc:icr:wpicer:16-2001

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  1. Alexander, Barbara & Libecap, Gary D., 2000. "The Effect of Cost Heterogeneity in the Success and Failure of the New Deal's Agricultural and Industrial Programs," Explorations in Economic History, Elsevier, vol. 37(4), pages 370-400, October.
  2. Hay, George A & Kelley, Daniel, 1974. "An Empirical Survey of Price Fixing Conspiracies," Journal of Law and Economics, University of Chicago Press, vol. 17(1), pages 13-38, April.
  3. Libecap, Gary D & Wiggins, Steven N, 1984. "Contractual Responses to the Common Pool: Prorationing of Crude Oil Production," American Economic Review, American Economic Association, vol. 74(1), pages 87-98, March.
  4. Moran, Theodore H., 1981. "Modeling OPEC behavior: economic and political alternatives," International Organization, Cambridge University Press, vol. 35(02), pages 241-272, March.
  5. Gately, Dermot, 1984. "A Ten-Year Retrospective: OPEC and the World Oil Market," Journal of Economic Literature, American Economic Association, vol. 22(3), pages 1100-114, September.
  6. Alexander, Barbara J., 1997. "Failed Cooperation in Heterogeneous Industries Under the National Recovery Administration," The Journal of Economic History, Cambridge University Press, vol. 57(02), pages 322-344, June.
  7. Griffin, James M, 1985. "OPEC Behavior: A Test of Alternative Hypotheses," American Economic Review, American Economic Association, vol. 75(5), pages 954-63, December.
  8. Wiggins, Steven N & Libecap, Gary D, 1987. "Firm Heterogeneities and Cartelization Efforts in Domestic Crude Oil," Journal of Law, Economics and Organization, Oxford University Press, vol. 3(1), pages 1-25, Spring.
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