Do Foreign Gifts Buy Corporate Political Action? Evidence from the Saudi Crude Discount Program.

• Author: Peck, Jennifer R.

1. INTRODUCTION

   Political and economic concerns are fundamentally linked in the world petroleum market. Access to a dependable oil supply is critical to economic and political stability, and these supplies rely on local political climates. Oil is used as a political tool by suppliers, and is a frequent topic of diplomatic intervention. At the center of this is Saudi Aramco, the world's largest producer of crude oil and holder of 25 percent of global reserves. Because of its position as a global swing producer, the economic and political drivers of its output decisions attract a great deal of attention.

   In addition to deciding how much to produce, Saudi Arabia also chooses where to sell its crude, a decision which receives much less attention but which is perhaps no less strategic. From 1991 to 2003, Saudi Arabia maintained a position as the top supplier of foreign crude to U.S. refiners in order to support its political alliance with the United States. Although oil is often thought of as having one world price, Saudi Aramco supported this export strategy by selling the same crude at different prices in different geographic markets. Maintaining the pricing differentials required by its export targets appears to have been both politically strategic and quite expensive: between 1991 and 2003, Saudi Arabia spent approximately 8.5 billion dollars selling discounted crude to the United States. The per-barrel discount relative to the Asian price reached a high of 6.30 dollars, 30 percent of the U.S. crude price in 2001, and was worth 1.9 billion dollars that year alone. In achieving its export target, Saudi Arabia therefore potentially transferred substantial rents to the U.S. oil industry in the form of discounted crude supplies. In addition to determining the total value of this transfer through its export quotas and pricing policies, Saudi Arabia also controlled how these rents were distributed within the United States; discounted crude was targeted at specific refineries using highly restrictive sales contracts. Despite the magnitude of this cost and the fact that these prices are publicly available, the Saudi crude discount program has received relatively little attention in the academic literature or in the popular press. (1)

   There are several potential effects of this export policy. First, the diversion of Saudi crude away from Asia and toward the United States likely decreased overall crude prices in the U.S. market, particularly for close substitute crudes. This generates a common benefit to American consumers and refiners, and this is likely the source of the political influence that Saudi Arabia sought with the policy. A second potential effect occurs if the discount was more than enough to place the desired amount of crude, i.e. if the Saudi crude was more attractive to refiners than substitutes because of the discounts. In this case the allocation of discounted crude is itself a political tool: refiners who receive discounted crude will have incentives to take political action in support of Saudi Arabia to protect their access to these rents. In this paper I first document the size of these discounts and identify the refiners that received this potential gift. I then examine the evidence that the discount generated rents to refiners by looking at the relationship between Saudi crude receipts and refining profits. I evaluate the use of this allocation mechanism as a political tool by identifying where rents accrued as a result of the policy and how these rents were related to political action by discount recipients. I examine the effect of discount receipts on one particular type of measurable corporate political action: contributions to congressional campaigns.

   The analysis relies on several key features of the market for Saudi crude in the United States. All U.S. refiners pay the same per-barrel price for Saudi crude each month, but quantities differ both across refineries and within a single refinery from month to month. These quantities are based on long-term contracts, but are subject to unilateral changes by Saudi Aramco each month. This yields variation in the total value of the discount to each refinery, which in turn creates variation in discount receipts across refining companies. It is therefore possible to estimate the effect of the discount on profits and political contributions.

   There are several main results. First, there was a great deal of heterogeneity in the nominal value of the discount received by different companies and significant geographical dispersion in the destination of Saudi crude. There is also variation even among refineries of similar capacity and in similar locations as well as within a single refinery over time. This variation allows for an estimation of the impact of discount receipts on refiner profits, and I find that most of the discount rents were captured by refinery owners as profits rather than passed through to consumers as lower gasoline prices. The capture of rents appears to have been almost complete, supporting the idea that the discount was purposefully targeted at specific refiners. This is the case whether discounts are measured against the Asian price of Saudi crude (i.e. from the Saudi perspective) or against other measures of domestic crude costs (i.e. from the refiners' perspective.) Receipts of imports from other countries do not appear to have a similar association with excess profits. Finally, I find that discount receipts were associated with greater overall levels of political giving as well as different patterns of giving. Recipients targeted more of their financial support to politicians who voted in alignment with Saudi interests and away from politicians who received significant support from pro-Israel interest groups.

   These results tie together several different literatures. First, although the Asian price premium (or, U.S. discount) for Saudi crude has attracted occasional comment in the trade press on petroleum markets, it has received very little attention in the academic energy literature. Exceptions are several papers that have attempted to explain the premium in terms of models of price discrimination or regulatory distortions. Soligo and Jaffe (2000) model Saudi Aramco's pricing decision as that of a dominant firm operating in two fully separated markets and assert that the Asian/European price ratio is consistent with reasonable values of supply and demand elasticities and Saudi market shares. In a response, Parsons and Brown (2003) propose an alternative model of international oil markets as a Cournot duopoly, with Gulf OPEC producers competing in both markets with local suppliers. Horsnell (1997) argues that government involvement in Asian procurement has been at least partially responsible for the higher prices Asian firms pay for oil. The Asian premium is also discussed in the detailed discussion of formula pricing in Fattouh (2011), who uses it as an example of how formula pricing can be consistent with different pricing policies across different regions with different competitive structures. (2) This paper adds to this literature by showing that these price differentials created rents for U.S. refiners, suggesting that the differentials were larger than those predicted by competitive conditions in the two markets.

   This paper also provides evidence on the incidence of heterogeneous cost changes in the oil refining industry. Borenstein and Kellogg (2014) examine the effect of a similar change in average input costs caused by the oil glut in the U.S. Midwest beginning in early 2011. They also find that the relative decrease in local crude oil prices did not pass through into wholesale gasoline and diesel prices, and conclude that refiners must have received the rents generated by the crude price shock. This paper complements their analysis by examining a setting with richer variation in cost changes and showing that not only was the cost decrease not passed through into prices, but that it was instead captured by refiners as profits.

   This paper also adds a quantitative dimension to the literature on the political economy of global energy markets, providing empirical evidence for the use of Saudi oil not only directly as a tool of political leverage, but through transfers to American companies. The political motivations behind Saudi supply patterns have been previously examined from a historical perspective, notably by Moran (1981) and more recently in a comprehensive history by Jaffe and Elass (2007). Moran (1981) argues that OPEC behavior is best understood by looking at the political motivations of Saudi Arabia between 1973 and 1980. In an unpublished working paper, Jaffe and Elass (2007) similarly argue that Saudi Aramco's behavior has often been guided by the kingdom's foreign policy goals; they outline the kingdom's policy of maintaining a position as the top global supplier of crude to the United States beginning in 1990, and provide a historical survey that follows the eroding relationship between the two countries and subsequent policy reversal in 2003.

   This analysis further adds to the broader literature on the relationship between business and politics and the determinants of political giving by corporations. There is a long literature suggesting that campaign contributions may be a key way for companies to engage in rent-seeking, including Pittman (1977) and Krueger (1974). Empirical work by Fisman (2001), Johnson and Mitton (2003), Sapienza (2004), Faccio (2006), Jayachandran (2006), Cooper et al. (2010), and Huber and Kirchler (2013) indicates that these political connections can be valuable to firms. There is also some evidence on what determines political giving and how firms decide how much to contribute and how to allocate donations. Notably, recent work by Holland et al. (2014) finds that firms may allocate campaign contributions to support their regulatory interests. There is also evidence that...