Why do leaders nationalize the oil industry? The politics of resource expropriation

Abstract

Why do leaders nationalize the oil industry? In line with a general utility-maximizing theory, I argue that leaders nationalize to maximize state revenues while minimizing costs. The latter includes international retaliation and domestic political constraints. Using a novel longitudinal dataset on the establishment of national oil companies (NOCs), the empirical evidence presented in this paper lends support to four primary findings. States are most likely to establish NOCs (1) in periods of high oil prices, when the risks of expropriation are outweighed by the financial benefits; (2) in non-democratic systems, where executive constraints are limited; (3) in “waves”, that is, after other countries have nationalized, reflecting reduced likelihood of international retaliation; and, though with weaker empirical support, (4) in political settings marked by resource nationalism. This last factor is proxied by OPEC membership in large-N analysis and, in a two-case comparison, by the difference in retained profits between the host and foreign governments. The theory and empirics presented here offer some clues for policy makers and multinational companies alike as to when to expect leaders to opt for nationalization.