Institutions and the supply of oil: A case study of Russia

In new institutional economics, the variance in institutions explains differences in cross-country output per capita. Institutions may also explain how the supply of oil is affected within oil-producing countries. For example in the early 1970s, as nominal oil prices increased from $3 per barrel to $11 per barrel, a number of OPEC oil producers changed the institutional environment by nationalizing their oil production and putting under government control all petroleum-related capital and infrastructure. This affected oil supplies. Similar institutional changes may be happening again now that oil prices are rising. In particular, the newly democratic Russia may be following the same path. The Russian government has already effectively taken over control of much of the oil production capacity in the country and is still heavily involved in natural gas production. In this paper, we will look at the Russian upstream oil industry as it changed from central planning to a market-oriented sector and is now swaying toward re-nationalization. Some of the laws and institutional transitions will be detailed in order to elucidate what has taken place.