Oil Sector Performance and Institutions: The Case of Latin America

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Jan 2015
Oil producers small enough to be price takers without barriers to investment or production should have reacted positively to the fourfold price increase after 2002. The seven largest Latin American oil producers reacted to this permanent price signal in different ways. Brazil, Colombia and Peru reacted positively, increasing investment and production. However, Argentina, Ecuador, Mexico and Venezuela did not react to the positive market signal, and instead paradoxically reduced oil production. We argue that these different responses among LA oil producers to the quantum leap in the price level over the last decade can be explained by differences in the institutional frameworks governing the oil sector in each country, and thus by each country's incentives to invest in response to changing price signals.