Legal constraints on market response to supply disruptions

by Fred Hoffman, David Seidman, John Haaga

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If an oil crisis suddenly disrupted the flow of oil to the United States, the task of allocating remaining supplies to domestic oil users could be left to the workings of intermediate and final goods markets. But legal constraints, especially those written into long-term contracts between firms in the oil industry, could make it difficult for private traders to reallocate supplies, preventing the market from efficiently distributing those supplies. This Note reports the results of an investigation into this issue. Based on an examination of representative contracts, cases, and statutes, the authors conclude that explicit contract provisions will not impede short-term efficiency of markets in a crisis. However, they find that certain features of the structure and organization of the oil industry, such as long-term, "quasi-contractual" relationships between firms, joint ventures, and large fixed investments, could provide firms with incentives that conflict with the goal of short-term efficiency in emergency allocations.

This report is part of the RAND Corporation Note series. The note was a product of the RAND Corporation from 1979 to 1993 that reported other outputs of sponsored research for general distribution.

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