Edited by Jennifer I. Considine
Chapter 4: Institutions and the supply of oil
Institutional economics theory suggests that the variance in institutions across countries can explain differences in cross-country output per capita such that better institutions result in better economic growth and vice versa. When considering the supply of oil, institutions may also explain how much oil hydrocarbon producing countries supply. For example, in the early 1970s, as nominal world oil prices increased from $2 to $14 per barrel of oil, a number of OPEC oil producers changed their internal institutional environments and started a process of nationalizing all petroleum-related capital and infrastructure. This affected oil supplies. While OPEC oil production had been increasing by 10 percent per year for the ten years prior to 1970, it increased by only 1 percent per year for the ten years after 1970, contrary to what normal supply side economic theory would suggest. Although many factors may explain this effect, institutional changes has to be one consideration. Further complex institutional changes may be happening again in this century now that oil prices are volatile and will have a large effect on oil supplies. This chapter considers the relationship between institutions, the supply of oil and the price of oil, especially in regards to risk taking and risk aversion within institutional frameworks. It also explains oil producer strategies including the Discount and Opulent Strategies.
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