Description
Why do international oil concessions collapse into nationalization? This article advances an enforcement-centered institutional theory that explains nationalization as the outcome of governance failure rather than a simple reaction to prices, ideology, or anti-colonial politics. Drawing on New Institutional Economics, the paper argues that early- to mid-20th-century concessions were structurally fragile because they were self-enforcing: sovereign hosts and international oil companies (IOCs) lacked credible third party formal courts. Over time, incomplete long-term contracts, sunk and immobile assets, and shifting political and fiscal pressures raise “enforcement costs” that must be paid by firms or, crucially, by their home states acting as informal guarantors. When the cumulative enforcement bill exceeds the joint willingness to pay of the company and its home government, concessions unravel, and nationalization follows as institutional change toward more hierarchical governance. Empirically, the argument is traced through a qualitative, archival case study of Aramco and Saudi Arabia (1930s–1980), using U.S. and British documents and published primary sources. The case shows how staged finance, diplomatic recognition, wartime Lend Lease, tax redesign and 50/50 profit sharing, OPEC led pricing and participation, and the 1973–74 shift to state to state energy diplomacy progressively substituted political instruments for missing legal enforcement, culminating in Saudi ownership by 1980. The theory integrates familiar explanations, sovereignty claims, price cycles, obsolescing bargaining, regime politics by specifying how they translate into rising enforcement demands. It predicts both where nationalization is most likely (self enforced concessions with high asset specificity and weak home state backing) and why it often proceeds gradually via participation when home state support is adaptive. Policy-wise, it reframes durable cross border resource governance as a problem of building credible, affordable enforcement often via hybrid joint ventures and downstream co investment rather than merely negotiating “good terms.”
