ABSTRACT
This chapter provides an analytical framework for discussing the relationship between institutions and performance in oil countries. It highlights the role of the state as owner of oil reservoirs. The way the state organizes the oil sector defines the industry's organization and affects the performance of the sector. The chapter analyzes empirical evidence from the seven largest Latin American oil producers with regard to investment, production and institutional changes over the last two decades. It shows that the different reactions to the quantum leap in prices after 2002 can be explained by the incentives to invest in response to market signals that are imbedded in the institutions governing the oil sector. Investment in oil production has several idiosyncratic features that make contracting particularly complex, most of which are similar to those of other mining activities. The best proxy for investment in the oil sector is the number of active drilling rigs.
