The Prize: The Epic Quest for Oil, Money, and Power

by Daniel Yergin

Ricardo developed the concept that was to provide the framework for the battle between nation-states and oil companies. It was the notion of “rents” as something different from normal profits. His case study involved grain, but it could also apply to oil. Let there be two landlords, said Ricardo, one with fields much more fertile than the other. They both sell their grain at the same price. But the costs of the one with the more fertile fields are much less than those of the one with the less fertile fields. The latter makes, perhaps, a profit, but the former, the one with the more fertile fields, receives not only a profit, but also something much larger—rents. His rewards—rents—are derived from the particular qualities of his land, which result not from his ingenuity or hard work, but, uniquely, from nature’s bountiful legacy. Oil was another of nature’s legacies. Its geological presence had nothing to do with the character or doings of the peoples who happened to reside above it, or of the nature of the particular political regime that held sway over the region in which it was found. This legacy, too, generated rents, which could be defined as the difference between the market price, on one hand, and, on the other, the costs of production plus an allowance for additional costs—transportation, processing, and distribution—and for some return on capital. For example, in the late 1940s, oil was selling for around $2.50 a barrel. Some grizzled stripper-well operator in Texa...