The Prize Chapter 22 Overview

The Prize, Chapter 22 Overview

In the 1940s and 1950s, the countries hosting American oil companies or subsidiaries wanted more from their foreign visitors and continuously argued about the financial terms of their concessions and “rents.” The central objective of their argument was to shift revenues from the oil companies and the tax receipts on oil in the consuming countries to become income for the exporting countries.

In chapter 22 we see the introduction of the concept of economic rent as the amount of profit above and beyond that amount necessary to keep oil in production. Thus, rent represented the difference between the market price and the cost of production plus an allowance for additional costs (transportation, processing, and distribution). It was viewed as a return from nature’s bounty. Viewed in another way, the question was: If through a tenant’s risk-taking efforts, the tenant made a discovery that increased the landlord’s property, should the tenant continue to pay the same rent, or should the rent be raised? The idea of the fifty-fifty model, and the contrast between how Venezuela handled it vs how Mexico handled it is a great story in capitalism and letting the free market work. Unlike Mexico, Venezuela achieved its national objectives without nationalization. And Venezuela’s model prompted Saudi Arabia to follow suit.

Clearly, a new relationship now existed between the tenants and landlords as the oil companies' position now did not just depend upon compliance with laws & payments to governments, but whether the whole concession is perceived as “fair” by the government & public opinion. It was bound to change if it was not perceived as fair. Interestingly and unfortunately, “fairness” and “unfairness” happen to be concepts of emotion and not fixed & measurable economic standards. The 50-50 principle, however, had the right psychological feel of fairness to it.