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

Author

Listed:
  • 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.

Suggested Citation

  • Gary Libecap & James L. Smith, 2001. "Political constraints on government cartelization: the case of oil production regulation in Texas and Saudi Arabia," ICER Working Papers 16-2001, ICER - International Centre for Economic Research.
    • Handle: RePEc:icr:wpicer:16-2001
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    References listed on IDEAS

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    More about this item

    JEL classification:

    • K2 - Law and Economics - - Regulation and Business Law
    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
    • N4 - Economic History - - Government, War, Law, International Relations, and Regulation
    • Q4 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy

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