Abstract: Who Pays the Price of Oil and Why? The Case of Standard Oil in Colombia

Marcelo Bucheli and Xavier Duran

Abstract

Why do governments subsidize home companies into opening operations in foreign markets? In 1913 Standard Oil of New Jersey competed with the British firm Pearson for a concession contract to extract oil in Colombia. Standard Oil won the contract in 1916 and started a long period of dominance in the exploration, extraction, transportation, and refining of oil in Colombia that lasted until 1948. Standard's success in obtaining the concession came after a lobbying campaign by this firm at the U.S. Department of State to pay reparations to Colombia for the U.S. involvement in the secession of the Colombian province of Panama in 1903. Before 1913, the U.S. government showed little interest in paying these reparations despite repeated demands by the Colombian government. After that year, however, the American government offered the Colombian government $20 million (the equivalent of 0.6 percent of U.S. federal expenditures and 7.3 percent of Colombia's GNP in 1913) and pressured Colombia's government not to sign a contract with Pearson. In 1916 Standard Oil was granted the concession contract, opening the way for Standard's domination of oil activities in Colombia until 1948, when the concession contract expired; Colombia created a national petroleum company in 1951. The event and magnitude of the U.S. subsidy to a single multinational and a single contract offers a window to study why governments subsidize entry of their home companies into foreign markets.