3 Government interventions in the oil industry and pricing were common around the world until three decades ago. World oil prices were opaque and were not uniform in the 1950s and 1960s. Vertically integrated companies dominated the oil sector, with opaque transfer pricing of crude oil to their own refineries. Transport costs were high, accounting for almost one-third of the landed cost of oil imported from Saudi Arabia to New York in the early 1970s. As a result, instead of one global market, there were many distinct regional markets each with its own prices (Stevens 2010).

The oil price shock of 1973 prompted governments to regulate prices and domestic oil supply even in developed countries. The Emergency Petroleum Allocation Act of 1973 authorized the U.S. government to exercise price and allocation controls in the oil industry until 1981. The Canadian government regulated crude oil prices between 1974 and 1985. The effects of these price controls were not always positive. A U.S. Federal Trade Commission report (Harvey and Roush 1981) concluded that the federal price controls in the United States had led to adoption of higher cost production methods as well as sporadic shortages that limited the days filling stations were open, restricted amounts and days in which consumers could purchase gas (alternate days by odd-even license plate numbers), resulting in long waits and travel from station to station for fuel. Analysis of these limitations in “The Welfare Costs of Rationing by Waiting” (Deacon and Sonstelie 1989) suggested that the queues cost some consumers—those who were fully employed—more than they saved as a result of price regulation. Efforts to hoard gasoline and an increased hazard of car fires from gasoline stored in containers in vehicles were among the secondary effects (Bradley 1995).

Although world oil prices doubled between 1978 and 1979 and remained twice the 1978 price level for the next three years, members of the Organisation for Economic Co-operation and Development (OECD) began to dismantle price regulation in the 1980s. Several factors contributed to this policy change. The commercialization of very large crude carriers reduced transport costs beginning in the late 1960s, and after 1973 the share of transport in the landed cost of imported oil declined precipitously, helping to equalize prices across different regional markets. The globalization of oil markets in the 1970s was further assisted by the rise of paper markets. Heating oil in 1978 became the first widely traded oil financial contract sold through a regulated exchange. By 1990, there were 10 active oil futures contracts trading worldwide (Medlock and Jaffe 2009). Today crude oil and oil products are commodities bought and sold in one international market; the only exception among the oil products considered in this paper is LPG, which is derived more from natural gas production than from oil refining and for which distinct regional markets still exist.

Instead of regulating prices or allocation, governments in high-income OECD countries over the past three decades have focused on creating market conditions conducive to healthy competition, ensuring fair trading and acting on anti-competitive behavior. The UK Office of Fair Trading, for example, has acted twice in the last two years to boost the transparency of heating oil prices for end-users (OFT 2011, 2012). Even so, as recently as 2003, the government of Portugal was still setting price ceilings for gasoline and automotive diesel (IEA 2004), and the U.S. State of Hawaii, fearing a lack of adequate competition, imposed ceilings on wholesale gasoline prices from September 2005 to May 2006. Producer subsidies also continue, although at relatively low levels. For example, according to the OECD database on fossil fuel subsidies, between 2009 and 2011, the largest annual producer subsidies in the oil sector among its members were found in the United States, averaging US$2.4 billion a year, followed by US$1.4