Oil and power: the effectiveness of state threats on markets

Abstract

To what extent can the threat of state regulatory or legal action affect an industry’s behavior? The question is relevant to a broad range of industries, from energy to technology companies, and is made especially salient by a transatlantic divide in regulatory approaches. We argue that state action can generate large behavioral effects, and use cases from the oil industry to support that claim. During the middle of the twentieth century, the global oil industry was dominated by an oligopoly of international oil companies called the Seven Sisters, including today’s ExxonMobil, Chevron, and BP. Despite their great market power, the Seven Sisters chose to keep prices extraordinarily stable at moderate levels. Why did they not raise prices, as the OPEC nations did in the 1970s, or lower prices to destroy their competition? We argue that the Seven Sisters could have manipulated prices in various ways, but they were constrained by political risks. The privileged position of the Seven Sisters required the tolerance, and sometimes the active support, of governments in both the consumer and producer countries. Our findings have implications for the study of oligopolies and antitrust enforcement, and for governance efforts to avoid climate change.

Keywords:

• Antitrust
• oil
• competition
• market power
• regulatory power
• monopoly power
• USA
• regulatory capture
• climate change
• energy politics
• OPEC

Acknowledgements

We are grateful to Dag H. Claes, Timothy Lehmann, and others who commented on our paper at the 2018 annual meeting of the International Studies Association; Jennifer Lind and the other participants in a 2018 workshop at the John Sloan Dickey Center for International Understanding at Dartmouth College; and the RIPE editors and three anonymous reviewers for their valuable comments and suggestions.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1 The Seven Sisters’ names changed over time. Exxon, Mobil, and Chevron were originally Standard Oil of New Jersey, New York, and California, respectively; Texaco was the Texas Company; BP was Anglo-Persian and later British Petroleum. We use their recent names for the sake of consistency and familiarity.

2 We define the Seven Sisters Era as 1928, the year of the Achnacarry Agreement, to 1973, when OPEC member states began setting prices on their own. It largely, but not entirely, overlaps with what McNally (2017) calls the ‘Texas Era.’

3 1955 Texas production of 1.00 million barrels per day is from Railroad Commission of Texas data, <www.rrc.state.tx.us/oil-gas/research-and-statistics/production-data/historical-production-data/crude-oil-production-and-well-counts-since-1935/>. Total U.S. production of 6.81 million barrels per day is from U.S. Energy Information Administration data, <https://www.eia.gov/dnav/pet/hist_xls/MCRFPUS2a.xls>. Total world production of 786 million tons annually (equivalent to roughly 15.07 million barrels per day) is from Odell (1997:3).

4 The planned level of 20 mbd was never reached, with Saudi production eventually peaking around 12 mbd – still far above the level to which Aramco limited production before the 1970s.

5 Later, in the 1970s, the United States would ban its own crude oil exports, from the United States to other countries, a restriction that was kept in place until 2015 (Van de Graaf, 2017).

6 Gallup Poll 885, December 4, 1973.

7 S. 2387 (September 22, 1975).

8 See also the Commerce Department study, ‘Proposed Commission to Review Oil Import Policy,’ 13 August 1968, White House Central Files, Subject Files, TA (Trade) Box 25, Folder: ‘EX TA4/CM Tariff-Imports 1 of 12, Oil, January - March 1969, Richard Nixon Presidential Library, Yorba Linda, CA.

9 As a State Department official complained in 1957: ‘The industry’s primary goal is reduced competition from ‘cheap foreign oil’ in order to secure higher crude oil prices. National security is a convenient cloak covering these aspirations.’ Foreign Relations of the United States (FRUS) 1955-1957, Vol. X, Doc. 259. On this theme see also Vitalis (2020: 21).

10 FRUS 1952-1954 Vol. IX, Part 1, Doc. 281.

11 FRUS 1952-1954 Vol. IX, Part 1, Doc. 279. On the role of the Seven Sisters in supplying oil to U.S. allies in Western Europe and East Asia, see also Kelanic (2020) and Painter (1986).

12 FRUS 1952-1954, Vol. I, Part 2, Doc. 161.

13 FRUS 1952-1954, Vol. IX, Part 1, Doc. 320.

14 FRUS 1952-1954, Vol. I, Part 2, Doc. 161.

15 Mexico claimed public ownership over all subsoil rights as early as 1917. See Hall (1995).

16 FRUS 1950 Vol. V, Doc. 36.

17 FRUS 1952-1054 Vol. IX, Part 1, Doc. 298.

18 FRUS 1958-1960, Vol. IV, Doc. 310.

19 FRUS 1961-1963, Vol. IX, Doc. 345.

20 FRUS 1969-76, Vol. XXXVI, Docs. 510, 596.

Additional information

Notes on contributors

Victor McFarland

Victor McFarland is Associate Professor of History at the University of Missouri.

Jeff D. Colgan

Jeff D. Colgan is the Richard Holbrooke Associate Professor in the Department of Political Science and the Watson Institute at Brown University.