Testing the Regulatory Threat Hypothesis

Abstract

We argue that during the 1979 oil crisis major domestic oil companies held down price increases of politically sensitive oil products relative to their foreign counterparts to reduce the probability of adverse government action. To test this "regulatory threat" hypothesis, we compare the reaction of unregulated fuel oil prices to political pressure. We measure political pressure with the level of U.S. television coverage of energy issues. We find that media coverage influenced U.S. home heating oil prices charged by domestic oil companies, but not foreign oil companies. In contrast, for the less politically sensitive residual fuel oil, media coverage did not influence prices of either domestic or foreign oil companies.