Can non-deterministic path dependence explain the oil price revolution?
Francisco Ebeling Barros, PPED/IE/UFRJ, +55 21 9164 1191, [email protected]
Introduction
Following Bridge and Le Billon (2012), contemporaneous oil governance – the set of rules and
organizations that guide how decisions over oil are made - is fragmented and incoherent, consisting mostly
of a patchwork of organizations with mandates focusing on the vested interests of their members (p. 155).
This includes pricing, which has always been one of the central tasks of world oil governance. According to
Mabro (2005), every price regime which has emerged in this or that period of oil history did reflect the
balance of power prevailing at that time. In this sense, borrowing from Dugger’s radical institutionalism
(DUGGER AND SHERMAN, 2000), probably the main driver of institutional change what concerns
pricing in the world oil industry are vested interests of dominant participants, which in critical moments had
the power to block or permit change. Those vested interests mostly said about economic interests and
geopolitical concerns. Nevertheless, power in a geopolitical and geo-economic sense is a complicated thing.
This includes the oil industry. Although dominant actors – the American government, big oil, Russia,
financial traders, OPEC, and the like - usually take the lead, intermediary stances do matter. As will be
shown later on, without their acceptance, also due to economic or geopolitical concerns, the way oil is
currently priced would not function.
One of the aims of this paper is to find an explanation of change in oil pricing that takes into account the
powerful role of politics and vested interests. Mainstream economics, which focuses its analysis on efficient
exchange, normally leaves outside that role. In this context, a mainstream explanation for change in world
oil pricing would probably speak of the acceptance of the virtues of the free market. There are not few
commentators that are ready to state that in the 1980s oil pricing went from state to markets due to those
virtues. A response from the point of view of political economy, which in fact is what mainstream
economics should look like, would contend that in the world oil industry economics and politics go hand in
hand. In a quite paradoxical manner, it was politics that allowed for pricing by the market to exist. It is
politics that sustains current pricing, among other initiatives through American military power. Although the
principal channels of oil pricing do take place in the market, this does not mean that the state was
irremediably left out of the equation (Horsnell, 1997).
The current approach does not disregard the narrative of competition. Competition, perhaps the central
constitutive part of globalization, is far from a homogeneous phenomenon. There are many arrangements
through which companies and countries can compete, which normally do not look like regular textbooks
would describe them, especially when describing the oil market. The world oil market is a complex
amalgamation of competitive clusters immersed in a sea of nation-states that hinder competition as a
neoclassical economist would call it. In this sense, using the orthodox toolkit to explain competition in the
world oil market is just too narrow.
A methodology to explain institutional change in the way oil is priced was found in new institutionalism,
which has acquired a certain tradition since the outbreak of the “institutional turn” in the late 1990s (Evans,
2006). Historical institutionalism, a sub-school of new institutionalism, probably the most influenced by old
institutionalism and its historical analysis, has path dependence as its logic of explanation (Schmidt, 2005).
Path dependence has had some acceptance as logic of explanation in in the field of energy studies. One
example is Karl‘s (1997) paradigmatic account of the poor performance of petro-states. According to
Pierson (2004), Karl’s work assumes that if certain features are encountered a country will necessary suffer
from the resource curse, in a very deterministic way. There are other works that question deterministic
accounts of the relation between natural resource endowment and economic development, such as Dietsche
(2009), Medeiros (2012), Reis (2012), Jones Luong and Weinthal (2010), and Brunnschweiler and Bulte
(2008).
In this paper I argue that Ebbinghaus’ (2005) non-deterministic path dependence model can be applied to
explain to a great extent the transformations that took place in the world oil market since the late 1970s,
which some call the “oil price revolution”. In other terms, the path dependent process I’m going to describe
is the grand narrative behind this transformations. Some of the main features of that revolution are an
increased importance of spot markets, the financialization of oil prices and products prices, the quasi
universalization of the use of reference prices and a widespread liberalization of energy markets and policies
around the globe. Nevertheless, since the oil market is very complex, a complete understanding of those
transformations would have to consider as well path dependent transformations in world refining, the
reasons for the behavior of outliers such as Asian countries, as well as a broader picture of the diffusion of
neoliberal ideas in government practices, as shown in Schmidt’s (2005) discursive institutionalism. I show
that, although the decisions made by some strategic actors at the critical juncture of the late 1970s and early
1980s has structured the decisions of other participants in that market, there is increasing openness to
change.
The paper is structured as follows: in the first section I review the literature on path dependence in general,
and on non-deterministic path dependence in particular. In the next session the reasons for change from
state-pricing to market-price and the critical moment in which that change took place – in the early 1980s are described. In the third session it is shown how that new set of institutions was accepted by world oil
market participants. In the fourth session openness to change is debated, and particular forms of how it can
take place are shown. Finally, I describe the possibility of inefficient outcomes, one of the central
characteristics of path-dependent processes.
Non deterministic path dependence
According to Arthur (1994, cf. Ackerman 2001), there are four conditions for a process to be described as
path dependent: (1) in the initial moment each strand should have equal starting conditions; (2) once a path
is chosen, more and more participants will accept it, thus augmenting its returns; (3) given that choice made
by many, the path gets locked in due to sunk costs; and (4) there is a possibility that an inefficient path is
chosen. Thus, following Pierson (2004) a fifth characteristic can be added: (5) relative timing matters. An
early comer’s probability of being the chosen path is bigger than a latecomer’s.
Ebbinghaus’ (2005) critique of this account of path dependence focuses on its determinism. More
specifically, on its low sensitivity to change. In deterministic path dependent processes change is due to
exogenous shocks, not to deliberate choices of participants.
Without discarding conditions (2), (3), (4) and (5) he argues that “developmental pathways” have a different
logic. Institutional change happens at critical junctures where, constrained by choices previously made,
strategic actors establish new rules. In this sense, it is important to take into account that what one perceives
as the trigger of a historical transformation is in fact nothing more than the crucial moment where a series of
conditions trespass a threshold. For the social scientist, taking a closer look at those conditions might be
more helpful than focusing on the historical trigger.
In the next phase those choices are institutionalized through self-reinforcing processes, were positive
feedback to that institution allows for the societal acceptance of a newly established institution, providing it
with legitimacy.
However, as Pierson (2004, p. 52) argues, nothing in path dependent analysis implies that a particular
alternative is permanently locked in, in such a way that change can continue to take place. Something new,
normally bounded by previous choices, may erode or swamp the mechanism of reproduction (Pierson, 2004,
p. 52).
This novelty could be the formation of a new coalition of strategic actors or a new appraisal of the societal
context by the existing strategic actors. Further, according to Streeck and Thelen (2009) institutional change
can also be accounted as a never ending, many times subtle, dynamic process. Those authors portray
institutions as rule setting mechanisms. In this sense, rule takers may try to reinterpret institutional rules to
their best interest (Streeck, 2009, 2010) in such a way that the outcome of those rules might be unexpected.
According to Streeck (2009, p. 179), institutional building is a “continuing process of social, political and
economic experimentation, of successive trial and error”, (…) extremely dependent on “political persuasion
and on a legitimating societal discourse”. Rigorously speaking, Streeck’s (2009, 2010) and Streeck and
Thelen’s (2010) account polemicizes with deterministic path dependence. Nevertheless, it is this author’s
belief that it is not incompatible with non-deterministic path dependence. Rather, the former authors’
approach complements it. In some critical junctures rule-takers might interpret that is to their advantage to
follow the rules. In others, rule-takers might decide to engage themselves politically in order to demand
institutional change.
Therefore, in a quasi cyclical way, earlier decisions made in the first critical juncture and institutionalized by
self reinforcing processes that followed might be questioned again in a new critical juncture. Constrained by
the existing balance of forces, which evolves over time, there are then three possibilities of change: path
stabilization, marginal adaptation to environmental changing or path departure (Ebbinghaus, 2005).
Mainstream neoclassical analysis has been reluctant to accept the described account of institutional change.
Liebovitz and Margolis (1995) argue that the scope for path dependence is very small because rational actors
always tend to choose the most efficient path. Third degree path dependence, an exception, would occur
only when actors are aware that they are choosing the most inefficient path.
This type of economists, Pierson (2004) argues, tend to focus on unique equilibria, normally a world of
predictability and efficiency. Quiet surprisingly, a theorist like North (1991), who in most issues accepts this
school’s premises, for instance rational choice, was one of the first to defend the idea of increasing returns
applied to institutions. The problem is that his account leaves little room for institutional change, as
increasing returns normally explain institutional stability, not change1. Besides questioning the premise of
rational choice, perhaps what is needed is a critique of intelligent design by markets and concurrence as the
sole logic of explanation of institutional change. For instance, Pierson (2004) has eloquently shown that
there are limits to institutional auto-correction via markets. Institutional change does not work as if
neoclassical schemata of markets were written in the institution’s DNA right from the beginning. Decisions
are taken from critical juncture to critical juncture, where strategic actors not necessarily are aware of what
do to in the next critical juncture. Moreover, if in a first critical juncture actors decide to deregulate and
therefore structure further deregulation, this does not mean that it will be the best decision. In no way
markets and concurrence are incompatible with path dependence, given their structural importance in market
economies. What perhaps is needed, in this sense, is to recognize that there is a very rich ecology of possible
ways in which markets and concurrence can exist. In a polanyian sense, markets are embedded in the
political realm in such a way that almost always the latter tends to condition the former. As will be shown,
governments normally are very important strategic actors in the entire cycle of path-dependency, not only in
critical junctures, but also in times that precede or follow them. Furthermore, nothing in the described path
dependence mechanism proposes the exclusion of other approaches, it is interdisciplinary par excellence.
For instance, there can be an open dialogue with game theory or discursive institutionalism.
Decision structuring conditions and the first critical juncture
The first aim of this session is to identify new conditions which structured the rise of WTI as the main
benchmark of oil in the United States and in the Americas2, and then of Brent as the most used global oil
benchmark. In can be stated that this conditions structured as well the widespread global acceptance of those
benchmarks. The birth of a third reference, Dubai, which is used to benchmark Middle Eastern exports to
Asia, will not be addressed here.
In this framework, a first condition which structured that decision was the degree of influence oil had and
still has on the control of the world economy. Torres (2004), Altvater (2010), Labban (2010b) and Mitchell
(2011) have exhaustively shown in which degree the global economy relies on fossil fuels, especially on the
oil and gas chain. That was especially true of the post-war economy, when “oil became embedded in social
institutions and material infrastructure” (Bridge, 2011) to an impressive degree. Although the world is now
1
For a full appraisal of how economists can be divided into a group which faithfully believes in institutional change and another
which believes that it is difficult, see Chang (2010). According to Schmidt (2005), in rational institutionalism change is seldom a
possibility. North’s institutionalism is a mix of rational and historical institutionalism.
2
Except for Mexico and Brazil.
turning to a more diversified energy mix, a locked in economic-geographic arrangement centered on
automotive transportation - still dominant in the United States and which is being reproduced in developed
countries such as Brazil and China3-, probably assures that oil will continue to be a decisive fuel in the world
economy. Oil is so important in geopolitics that the probably dominant explanation for the oil wars
witnessed in the last three decades, for instance Harvey (2005), centers its argument in a sort of abstract
control of oil in the Middle East as the precondition for the control of the world economy. According to
Roberts (2005), in this knotty geopolitics of oil the United States still have a preponderant position, mainly
due to the size of its domestic market (Roncaglia, 1985), although in the last two decades China has
presented itself as a serious challenger.
Nevertheless, this preponderance was threatened in the early 1970s, when most OPEC countries such as
Libya (1970), Iran (1979) and Saudi Arabia (1980) nationalized their oil companies. The nationalization of
oil in those countries brought upon a second condition for that structured the decision to change pricing.
Although spot markets existed before those events, being used mostly by independent oil companies, they
only gained on importance when majors such as BP were forced to go out on the spot market after losing a
great part of its supply. Other companies saw themselves forced to follow suit (Yergin, 2003).
Linked to the nationalizations, a third condition was the takeover of global pricing by OPEC in the early
1970s. Although its consequences are undisputed, the inner meaning of the takeover of global pricing by
OPEC is highly controversial. On one side, Gordon (2009) stresses that the takeover by OPEC represented a
sort of attack on the “free world”. On the other, Bina (1985) argues that the true meaning of the takeover
was to make possible the exploration of marginal fields outside the Middle East. By his turn, Odell (1986)
highlights the takeover as a sort of plot between the United States and the OPEC countries which aimed at
undermining the competitiveness of other developed countries at the time. The former were living economic
hard times in the wake of the 1970s crisis.
A fourth condition was the rise of non-OPEC production, in particular in the North Sea, which until the
1970s used to be historically marginal. This meant also an increase in the number of producing countries, in
part because of the nationalizations of the 1970s, when the International Oil Companies had to find new
exploring areas. According to Parra (2010), the number of NON-OPEC producing countries rose from under
20 in 1950 to over fifty in 2003. As it began to become relevant and competitive on the international market,
production in the North Sea began to play a key role in the political and economic balance in the oil world
(Carollo, 2012, p. 34). As will be seen later, this decision structuring condition was very specific to the case
of Brent.
A fifth condition was the new approach to energy both in the United States and the United Kingdom, which
was based on the conviction that a free market could allocate scarce supplies most economically and
efficiently through prices set by market forces (Singer, 1982; Coll, 2011). Robert Solow played a decisive
role in spreading neoliberal ideas in the field of energy, especially for having recovered Hotelling’s
forgotten work. In the 1930s, the latter had argued “that in a competitive market there would be an
equilibrium path in which the price of oil would rise at the prevailing rate of interest for capital invested in
projects with a similar degree of risk” (Mitchell, 2011, p. 195). The diffusion of those ideas had the
consequence of pushing away governments from energy governance. Its role should limit itself to
establishing futures markets for energy and to gathering information for market participants, for instance
through the creation of the Energy Information Administration in the United States and the International
Energy Agency, in Europe. The consequence would be that oil could now be seen as a commodity just like
any another, a vision which in the limit could result in the establishment of a world oil market, in which the
origin of a given barrel wouldn’t matter that much (Coll, 2011). The reliance on globalized oil marketing
was also seen as an approach to energy security. In this sense, Greenspan (2008) argues that the activity of
markets created a kind of buffer layer to geopolitical threats” (p. 426-7). Another interpretation for a market
approach to energy was that in the early 1980s the Reagan administration attempted to curb back the
economy by promoting a more intensive energy exploration and by deregulating private energy supplies.
Contrary to common sense, these decisions reaffirmed a belief that there was a historic role of government
3
Which some call the “urban sprawl”
as a promoter of economic growth. What it rejected was the additional role of regulator and intervener. In
this sense, the primary goal of the Reagan administration was to remove governmental impediments to
corporate action in the hope of stimulating economic growth. This approach entered into history under the
name of “supply-side economics” (Melosi, 2006, p. 13-4)
This set of conditions brought upon a major transformation in the way oil was priced, a decisive shift
towards an almost full commoditization of oil under the control of the Anglo Saxon world. The first step
towards that objective took place in the United States, with President Reagan’s decision in January 1981 to
deregulate oil prices and to remove controls that had previously encumbered the industry. This decision
resulted in the reintegration of the US petroleum sector into the global petroleum economy for the first time
since the 1950s, in such a way that this market once again began to exert itself forcibly on global oil pricing
(Morse, 1999). The decision to remove governmental decontrol on prices fostered an immediate
convergence of WTI spot prices into a single commodity that prior to the decontrol was split into various
categories under the control mechanisms (MILLER, CHEVALIER AND LEAVENS, 2010). By its turn, the
end of federal regulation opened the opportunity for the rise of futures energy markets. In October 1981, a
gasoline futures markets was set in NYMEX; a futures market for oil was instituted in 1983.
A second step towards that objective started to be achieved when, in November 1976, the oilfield Brent
started production in the North Sea. In a similar fashion, the rise of Brent as the leading global benchmark in
the oil industry happened in a context of intense deregulation not only of the British oil and gas sector, but
of its economy as a whole. This included the progressive privatization of Britain’s national oil company
BNOC, in the early 1980s, an intensive bidding policy from the 1980s onwards, the removal of depletion
policies in the 1980s and a decrease of E&P taxation in the 1990s (Parra, 2010). Furthermore, it happened in
a context of increasing financialization of the British economy. Until the 1980s, the United Kingdom
occupied a special position in international markets because it was an important exporter and because its
crudes were widely traded and their prices widely quoted (Parra, 2010, p. 258). As such the British oil and
gas industry was hurt by the discritionarity of OPEC’s policy in the late 1970s and the early 1980s. At first,
since the London Agreement of 1983, the country accepted to cooperate with OPEC on price matters,
adopting an interventionist line on oil prices (Parra, 2010, p. 282). But later, during the oil war of 1985,
Britain showed no intention of reducing North Sea production. Oil prices had reached very low levels. In
this context, the Tatcher administration wanted to reach the objective of having a crude oil price that was the
result of free market transaction and without any political control by the OPEC cartel.
An alternative solution for fixing the price of crude in a market context came from the North Sea, when
Shell UK published the ’15 day contract’. For the first time the price of crude, Brent, was traded in a sort of
primitive petroleum exchange. Located in London, it soon became a regional reference for oil and trading
companies, which were linked to majors and independent operators. When the 1987 “blood bath” happened,
an event in which the biggest companies producing Brent Blend (Shell, Exxon, Chevron and BP) had to take
responsibility for the traders who were missing in the chain, it was clear that the Brent ’15 days contract’
had to be transformed into something bigger (Carollo, 2012, p.100). In this sense, a further step was taken
when, in 1988, the International Petroleum Exchange launched the Brent Futures contract. A purely
financial market for oil was created, termed “super market” Brent by Carollo (2012), where no obligation for
the participants to buy physical cargos applied. It became purely financial, thus diminishing the transaction
costs of entry for the regular investor. The author argues that this shift was the precise moment in which the
revolution in the international oil market took place, in a sense that this financialized oil market had no
longer any connection with the physical crude oil market.
The Institutionalization of the oil price revolution
It must be stated that countries and companies which accepted WTI or Brent as their benchmarks, thus
following the new path, were also influenced by the aforementioned conditions. For instance, they were
aware of the size and importance of the American market, they operated widely in spot markets, they were
directly or indirectly hurt by OPEC pricing, they saw their own production’s importance rising in the 1970s
and 1980s, and they also chose or were forced to adopt a market approach to energy in general and to oil in
particular in the wake of globalization4. Given that set of conditions and their perception of the advantages
of using WTI and Brent as benchmarks, they chose to use them as their new references or to start trading in
futures markets. From the point of view of Ebbinghaus’ (2005) path dependence, a widespread acceptance
of the new oil pricing institutions meant that their returns increased to such an extent that it managed to
stabilize. From Streeck’s (2009, 2010) and from Streeck and Thelen’s (2010) point of view, rule-takers
accepted the new pricing rules because they realized they were advantageous for themselves. Nevertheless,
the accession to the new institutions of the global market, which in the limit sets the tendency towards the oil
market becoming a global oil exchange (NÖEL, 1999a) was far from homogeneous amongst the diverse
countries and companies, and had different meanings for each country that acceded to it.
The first to adhere to the new path were the oil companies that operated in the American market. As Clô
(2000) argues, at first the majors first had kept way from the free market because they considered it not
reliable and a cause of instability. Nevertheless, the loss of part of their supply had forced them to trade on
spot markets, including in those which were set by OPEC countries5. But, following Yergin (2003), prices
sold in spot markets are very volatile and uncertain, so that a mechanism to minimize their risk was needed.
This was especially true after the second oil shock (Pinto Jr., 2007, p. 82). That gave rise to futures markets,
in 1983, which allowed them to acquire a right to buy the commodity at some month in the future (Yergin,
2003, p. 724). This practice was called hedging of price risks (Carollo, 2012, p. 104-105; Pinto Jr., 2007, p.
82). Crude oil traders in the international market could hedge the prices of cargoes enroute to the United
States which were to be sold on arrival on the spot market by selling WTI futures as protection against
possible price declines while the cargo was in transit (SEBA, p. 99). In fact, according to Juhasz (2009), it
was the industry’s support which allowed NYMEX to control the futures markets (p. 150). This is in line
with Arthur’s second path dependence condition, that is, a given path is institutionalized when participants
choose it, thus augmenting its returns.
A second case was that of Mexico. The country’s national oil company PEMEX was the first to adopt a
market related pricing system in 1986 in the shadows of the collapse of the OPEC administered pricing
system in 1986-1988 (Fattouh, 2010). According to Mabro (2005), this new concept involves a formula
linking the price of a given export crude to a reference price or a set of reference prices, escalated with
changes in spot market crude prices (Hartsthorn, 2010, p. 199). The main reason for that change was that
Mexico’s oil exports are almost entirely directed to the United States, with a very low basic risk. In that
market, exporters are not only competing among themselves, but also with domestic oil producers.
Following Mabro (2005), there is a market where the degree of concentration on both the selling and buying
side is not very high, in which a market related pricing system makes great sense. Other exporting
countries, such as Venezuela, which had the US as their main client, also changed pricing, fearing not
maintain their market share in the US (Morse, 1999).
What concerns the institutionalization of Brent as the leading global benchmark outside the United States, it
was in great part achieved when Saudi Arabia started to let aside strategies like flooding the markets with
their cheaper oil (Parra, 2010), which they used during the price wars against OPEC and NON-OPEC
countries. Constrained by a growing budget, the Kingdom started to perceive that market share and oil
revenues were more in their interest than higher prices (Askari, 1991, p.41). It became aware that regulating
simultaneously quantities and the price of oil was a difficult strategy, which could mean a huge loss in
production and of exports and revenues (Mabro, 2005). Thus, it chose to regulate the former (Clô, 2000, p.
201).
In 1988, guided by Saudi Arabia, OPEC adopted the Brent as its new benchmark. According to Mabro
(2005), the conversion to a market-related pricing system in which each member country has a differential in
relation to the benchmark was not due “to some mystical conversion to the lights of some of good economic
truth”. For the author, OPEC was facing not only strong competition from new sources of oil production and
4
According to Lister and Marsh (2005, p.257) the process of globalization does not mandate a singular response from the state,
being mediated by an ideational filter. Whilst some states may undertake actions which seem to erode their power and authority,
this would be their decision, not the response to some structured necessity. On the other side for Amsden (2007) countries such as
the United States actively fostered third world countries to adopt deregulation policies, especially in the 1980s.
5
OPEC used differential pricing.
export, but also from Brent. This was for instance the case of Nigeria, whose oil was very similar to Brent.
In this sense, Brent’s very rapid price movements were disastrous for the country (Carollo, 2012, p. 38).
But there are other interpretations for that change. According to Goldthau and Witte (2009), a push towards
liberalization was tolerated by Saudi Arabia (and other producing countries) because they hoped to attain a
higher degree of control over government budgets that were highly sensitive to fluctuating oil prices.
According to Parra (2010) and Carollo (2012) Saudi Arabia could have accepted Brent in order to start a
new price war. On his turn, Fattouh (2010) argues that the use of a pricing formula linked to a benchmark
allowed to share the risk of agreements in which the date of pricing occurs around the delivery date6.
Finally, according to Parra (2010), of great importance was Bush Senior’s visit to the kingdom in 1986,
when he was cast to try to convince the kingdom’s representants that a higher price was of their best interest,
especially in order honor signed contracts of military purchases. In this sense, leaving aside the strategy of
controlling supply could be superior.
The decision had a stabilizing effect for the cartel, because it provided an incentive for cooperation, in a
sense that the market, by bringing prices down, made it more profitable for OPEC countries to reestablish
agreement rather than seeking individually to profit from their own actions (Ayoub, 1994). Thus, by giving
in only pricing, the Saudis and OPEC could in theory guarantee the until today dubious role of controlling
extraordinary rents by coordinating produced quantities, in line with Marxian and Ricardian interpretations
of absolute and differential rents.
Finally, many countries – importers or exporters - and market participants of diverse importance and of
various natures followed suit. Due to reasons explained before, most exporting countries, but also traders
and refiners, accepted the new benchmarking technology according to their geographic region or their
exporting markets. On their turn, many importing countries, because of conditions of abundance of oil
supply and convictions about the institutional efficiency of markets, were encouraged during the 1980s to
dismantle public policies applicable to the field of energy (Clô, 2002). This meant that conditions were set
also for the liberalization of internal energy markets, including markets for crude oil products. Through the
further opening and liberalization of energy markets it started to become possible not only to use
international markets to arbitrate between sources of supply of crude oil products, but also to create hedging
mechanisms for market participants. In this sense, under the lenses of non-deterministic path dependence,
liberalization of crude oil markets can be a natural consequence. Non-deterministic path dependence is
advantageous because, although adherence is optional, in some cases rule conformation appears to be the
only option. The latter is especially true for small importing countries, which do not have the choice of an
alternative pricing. In this sense, they must conform to changes and deal with its consequences.
Sticking to the former possibility, optional adherence, it is important to describe the Brazilian case, which at
a first sight seems to have neatly conformed to changes. The country has liberalized its crude oil markets in
the last two decades, ANP – the national regulatory agency for oil, gas and biofuels - uses Brent in order to
calculate the payment of royalties, and Petrobras’ refining department and downstream branch actively use
international arbitrage between diverse sources of supply. Nevertheless, Brazil is an outlier which confirms
the non-deterministic nature of the described path dependency. Although the crude oil markets have been
liberalized, since 2005 the government has been instructing its national oil company not to raise domestic
prices allegedly in order to attain macroeconomic goals. In this context, there has been a widespread debate
on whether that policy is hurting the company’s bold investment plans (Viegas, 2012; Colomer and Tavares,
2012; Almeida, 2012).
New critical junctures: contestation?
The aim of this section is to provide some interpretations of what could be new critical junctures and what
type of institutional changes followed. The turning of prices to the market and growing financialization,
which are the main outcomes of the first critical juncture, structure new decisions in more recent critical
junctures. In this most recent critical junctures there is a growing role for emerging market participants such
as banks and China. It is argued that these changes can range from path stabilization to path departure. From
6
In the case of Saudi Arabia’s exports to the USA, the date of pricing can vary between 40 to 50 days after the loading date. The
price used is the benchmark quotes averaged over ten days around the delivery date (Fattouh, 2010).
Streeck (2009, 2010) and Streeck and Thelen’s (2010) point of view it could be stated that in this new
critical junctures old and new market participants interpreted that is was of their interest to question the
existing rules. Or, through another channel, the inconsequent decisions by some of the market participants
may lead others to question the existing rules.
The outcome of the first analyzed new critical juncture was probably something between path stabilization
and marginal adaptation to environmental changing. It concerns the further deregulation of futures markets,
a process which started in the 1990s and deepened and already existing tendency to the opening of markets.
Financialized oil markets proved to be an extremely lucrative market, in a context of surplus and downward
pressures on prices and of growing volatility, thus attracting new protagonists. According to Labban
(2010a), this new protagonists were big investments bank and other financial outfits which, first assumed the
risk for companies trading in physical oil markets, setting up specialized trading departments, the so-called
Wall Street refiners, but later started to act as traders and market makers, taking positions of their own on
the market. In this sense, the possibility of exploring new markets acquired an efficacy of its own that
engendered the further transformation of the whole oil sector. If rules for speculative position limits were
historically much stricter in the past (Medlock and Jaffe, 2009), the ability to speculate on oil prices
increased with the deregulation of energy derivatives (Bridge and Le Billon, 174). These new entrants
actively fostered deregulation of futures markets and derivatives trading, engaging charismatic and/or
powerful personalities for that purpose (Zalik, 2010). Some of those characters were Wendy Gramm, a
former US Commodities Futures Trading Commission Chairwoman and later a member of the ENRON
board, and her husband Phil Gramm, a Senator and recipient of Enron campaign donations. While the
former pushed to allow energy contracts to be traded outside of regulated market and be exempt from antifraud provisions, the latter maneuvered to pass further energy trading deregulation in December 2000
(Bridge and Le Billon, 174). The Commodity Futures Modernization Act effectively cleared the way for
more lax regulation of new oil risk management products. That regulation also designated certain OTC
derivatives transactions to be outside of the jurisdiction of the CFTC (Medlock and Jaffe, 2009). An
alternative US derivatives market grew facilitated by that more lax regulation – Intercontinental Exchange
(ICE). Later on ICE, bought London’s IPE, shifting it to its electronic quotation system..
A second possibility of change in the oil industry is the change of benchmark, which can be described as a
marginal adaptation to environmental changing. Despite the change of benchmark, the nature of market
transactions is kept. Thus is a type of marginal adaptation. Following Montepeque (2012), pricing
benchmarks may be severely challenged by logistical, regulatory, geopolitical or geological conditions, but
if they fail to adapt quickly, their usefulness ebbs away. Market participants, such as traders and refiners,
require the price of the physical and the generalworld market to converge. They use the benchmark as a
reference in their netback calculus. If the price is believed to be disconnected from global market conditions,
the benchmark’s usefulness erodes (Montepeque, 2012). Moreover, financial instruments and the physical
market must converge in a benchmark. This conditions, the author believes, have been supplied by the Dated
Brent. According to Horsnell and Mabro (1993), the Brent stream is a good benchmark because it has a very
good infrastructure, a good taxation structure, is very liquid and very transparent. The same cannot be said
of the late WTI that, in a seemingly inexplicable fashion started to cost more than $18 less than the Brent.
According to Carollo (2012, p. 26-7), this anomaly was planned in the financial environment some months
in advance, exploring the industry’s constraints and the market’s structural problems. These explored the
fact that it is not possible to move WTI from Cushing to the refineries on the east coast of the USA and
started to sell WTI on NYMEX and buy Brent on ICE, inverting and widening the price spread between
crude oils. After that, one of the investors in this specific business hired in advance all the railways capacity
from Cushing to the Atlantic coast, and started to transport some WTI, thus making heavy profit. The result
of the problems concerning the reliability of WTI is that countries such as Malaysia and Australian oil & gas
companies have been shifting from WTI to Brent.
Path departure can also happen, even though sometimes short-lived, when countries such as Russia, Iran,
Venezuela and Iraq announce that they prefer to sell their oil in Euros or against barter (El-Gamal and Jaffe,
2010). The authors argue that if some of the major exporters announced with credibility its intention to sell
oil and gas for Euros or a basket of currencies, this could start a flood of diversification, which could be
catastrophical for the American economy. From the American point of view, a possible solution to that
problem could be diversify energy sources or invest in domestic production, which seems to be the trend for
the next years. In this sense, according to the IEA it is very likely that American oil production will
overcome that of Saudi Arabia around 2017.
A second possibility of departure, this one of a possibly more persistent nature, is the establishment of loanfor-oil deals. A possible interpretation is that China has been engaging itself with that type of arrangement in
places such as Iran, China and Venezuela in order to lock up oil supplies even if Chinese NOCs do not
actually own a significant proportion of these oil assets. Since 2009, Beijing concluded at least 12 of these
loan-for-oil deals with interests in Russia and Venezuela, in which promises are made to sell an agreed
amount of oil from selected fields to China, rather than in international commodity markets or other
countries (Lee, 2012). From the point of view of an oil country such as Venezuela, very vulnerable of its
exports, a possible rationale for engaging in such an agreement could be the perception of shifting
hegemony in the world oil market. If a country with market power such as China starts a more aggressive
policy in the international market, it can impose a different approach to trading and energy security. This
view enshrines much more than the Anglo-Saxon world the importance of non-market coordination. Another
example of path departure, although marginal, is Venezuela’s initiative to sell cheaper oil to Caribbean and
Central American countries. In this context, the profit motif is apparently obfuscated.
“Taking efficiency seriously”
What concerns the issue of efficiency, in the following it is argued that most authors, especially in the
neoclassical tradition, systematically “undertheorize”, to use Evans’ (2006) terms, when they seek an answer
to the question whether oil markets are efficient or not. To do that, the expression “taking capitalism
seriously”, (Streeck, 2010), is borrowed and adapted. Nevertheless, this narrowness is not only due to
differences in approach, but also to the very nature of globalized oil markets.
To assess the efficiency of oil markets means, above all, to deal with the efficiency of asset markets, because
the most relevant oil prices – Brent and WTI - are determined in futures markets. But products markets are
also considered. There is a long-held view that asset markets are efficient, because they are competitive
markets where information is conveyed very rapidly (Hill and Myatt, 2010, p. 145). But the efficient market
hypothesis was first developed by Eugene Fama in 1965 (ORTIZ-CRUZ et al, 2012). According to that, by
definition markets are inherently unpredictable, in a sense that every stock price will follow a random walk.
The importance of the EMH relies on the fact that in an efficient market all available and relevant
information are fully and instantaneously reflected on the price of a market security so that no one can take
advantage of this information (ibidem). The unceasing interaction of thousands of buyers and sellers eager to
make a profit or hedge their risk, although aleatory, the hypothesis contends, leads to equilibrium. Averaged
over fairly short periods, the prices discovered should offer better possible indications of what will happen
to prices in the future than any other data or analytical technique (Harsthorn, p. 217). In an efficient market
there are neither undervalued nor overvalued financial assets, such that their market prices are a proper
guide for capital budgeting and allocation. The hypothesis rests on assumptions such as frictionless markets,
information availability and transparency, investor rationality and arbitrage. Although those assumptions are
widely questioned (Hill and Myatt, 2010)7, in order to make the EMH fully functional, its defenders
generally keep pushing for even more deregulation, with controversial results. In this fashion, deregulation
would mean increasing the institutional efficiency of the market and the industry as a whole.
The promises of efficiency might have pushed the determination of oil prices to the futures markets,
especially in a historical time when there was a great concern over the possibility of an “oil weapon” being
7
The most proeminent critique of the EMH is Minsky’s Financial Instability Hyphotesis. According to the author, during the
upswings of a business cycle the firms, having expectations concerning consumption and returns, tend to invest, which induces
multiplier and accelerator effects, which enhances the upward movement of the cycle. At the same time, credit availability rises,
expanding real and speculative excesses. The quantum of investments made by firms rises, as well as its accompanying risk.
During the height of the boom, finance has a tendency to dominate industry with the rise of unproductive speculation in the stock
market. There is then a dramatic increase in recognized uncertainty as the prevailing business climate deteriorates. A typical
consequence is the reduction of the prospective yield of investments. Endogenous forces typically emerge during the upswing,
such as higher oil prices, leading to anomalous processes that periodically impinge on capitalist societies. With high levels of
uncertainty, the drop of prospective yield in the financial industry feeds back negatively on the industry (O’Hara, 2007).
used by producer countries. In the 1980s, the bulk of oil started to be traded under contracts (mostly shortrun) whose prices were linked to the prices on the commodity exchanges. There was a quest for prices to
become “visible” (Goldthau and Witte, 2009). In this sense, the growth in the use of financial instruments
explicitly linked to oil aided in price discovery by bringing open accessible, readily available information
about current and expected future market conditions into the market price (Medlock and Jaffe, 2009).
Three forms of market efficiency can be established: the strong form, which rests on public and private
information; the semi-strong, which rests on public information; and the weak form, resting on all past
movements (Fama, 1970, 1991, in ORTIZ-CRUZ et al, 2012). Most tests concerning the oil price focus on
the weak form, with the narrowest set of information. In this sense, stock market efficiency does not depend
upon the best-informed expectations available at any time eventually turning out to be right, but denotes the
best analysis and judgment of what is generally known at any time (Hartsthorn, 2010, p.217).
Writing in 1993, Hartsthorn (2010) argued that neither Brent forward nor NYMEX qualified as efficient
markets, mostly due to a lack of participants. This also applied for products markets. Later works held quiet
opposing views. Clô (2000, p. 210) stated that while futures markets are mostly efficient, the same is not
valid for the diverse spot and product markets, mostly due to the lack of reliable information. Charles and
Darne (2009) argue that the Brent crude oil prices are weak-form efficient, while the WTI seems to be
inneficient on the 1994-2009 period, suggesting that deregulation has not improved the efficiency on the
WTI crude oil market in the sense of making returns less predictable. For Alvarez-Ramirez et al (2010),
empirical evidences have indicated that crude oil markets are not-uniformally efficient and that prices can be
forecasted to some extent using empirical models. According to Wang and Liu (2010) the WTI crude oil
market was gradually close to random walk behavior for short, medium and long time scales using time
varying multiscale analysis. Finally, according to Ortiz-Cruz et al. (2012), there is evidence of time-varying
efficiency for daily crude oil returns over the deregulation period starting in 1986 for the WTI.
Even though there are controversies whether oil prices are efficient or not, it is an issue which can be
relativized. It is useful to bring along some definitions of globalization to shed light on this point. Jessop
(2005) sees globalization as a multiform phenomenon, operating on diverse scales. One of its forms, the
adoption of global benchmarking, is seen by the author as a process that increases the ecological dominance
of capitalism and of its contradictory dynamic. Nevertheless, it is achieved in a dispersed, fragmented and
partial manner, far from creating a homogenized world economy. According to Marsh, the real power of
globalization lies not in its material reality, but in its discursive construction (Hay, in Lister and Marsh,
2005, p. 186). That is, achieving efficiency in global benchmarking in a partial manner is acceptable; what
really matters is its material reality. The material reality of a functioning global oil benchmarking is its
utility to global oil market participants: traders, oil companies and refiners. What they need is a more or less
reliable benchmark in order to pursue their goals in a lucrative way – selling oil in the case of oil companies,
buying oil to sell products in the case of refiners - despite of a transitional or durable degree of inefficiency.
The efficiency of crude oil markers, but also of products markets, can be contended as the precondition for
the very efficient functioning of those market participants. In his sense, financialization as defined by
Labban (2010a) - a process in which oil companies to a great extent align their productive processes and
their strategic productive decisions with the prices of the market – deeply relies its fate on the accurateness
of the prices expressed by the market. In this sense, as discussed before, it must be stated that, if that degree
of inefficiency – which generally means an unreliable indication of the future mood of oil prices – becomes
too big, the benchmark might lose its importance.
However, this account on the efficiency of oil markets is not sufficient for critical social scientists and for
critical political economists. In recent years there has been a widespread discussion whether oil prices have
been rising because of speculation since the early 2000s. More specifically, it has been argued in the
aftermath of the 2008 oil crisis that the hyperactivity of traders on Wall Street was the factor hold
responsible for the bursting of the bubble, when prices dropped from $150 to $30. On one side, Bourne
(2010) argues that the physical oil price is set by the market and that evidences show that the whole price
complex sends out signals that faithfully reflect the fundamentals of supply, demand and inventory levels.
On the other side, Serrano (2008) understands that theses on the role of China8, of the super spike, of supply
and demand and of geopolitics are not sufficient to explain the rise of oil prices. For him, speculation does
play a role. The interpretation here developed on the rise of oil prices builds upon Crouch’s (2011)
explanation for why financial markets with very complex financial products might fail. For the author, an
approach which relies heavily on rational decisions made by a large set of market participants that constantly
evaluate the consistency of particular asset can fail because it is based on chains of interpretations of
interpretations that might get cut off and lose touch with reality. That is, between the supposedly rational
market participant and the particular asset there are intermediary instances in which the quality of the
information can be blurred. Following Spector (2005), an analysis of speculative interest in energy is a value
judgment. This can be made based on poor quality information but also with poor understanding of the
international oil market. A strong herd instinct which encourages bubbles and significantly aggravate
volatility might follow (Stevens, 2005). Moreover, the futures oil markets are not cartelized but there is
effective leadership. A bullish mood can prevail in such a way that after a prediction made by those who
exert effective leadership prices might fall or rise beyond a “natural equilibrium”. In sum, prices are set on
the market but they might be established in a flawed manner. Notwithstanding, following Banks (2007),
speculation requires fundamentals. According to Machado and Szklo (2008) the main reason for the
tendency of rising oil prices in the long run are uncertainties on future oil demand and supply. It might be
then that these interpretations over uncertainties are not made in the most suitable manner, in such a way
that prices might have risen beyond their reasonable landing. Following Bridge and Le Billon “although the
role of market speculation in driving the price of oil is disputed, what is clear that price signals emerging
from oil markets are not translating into the sort of changes one might expect what regards supply and
demand”. According to the authors, “substantial rises in the price of oil since 2002 have neither caused
aggregate demand to slacken nor have they generated significant growth in supply” (p.90). Although
mathematical calculations are claimed to be able to certify that prices are efficient in the sense that nobody
can manipulate them, one wonders to what extent prices effectively have predictive content.
After having accepted that high or low oil prices might not always contain the most fair and efficient
judgment, an entire ecology of other types of efficiencies is identified, which mainstream economic analysis,
focused solely on exchange, is not willing to accept. These include: dynamic efficiency, a type of social and
distributional efficiency, “green” efficiency, the efficiency in related markets. It must be stated that the
analysis of the relationship between high oil prices and of dynamic and “green” efficiencies can be totally
independent of issues concerning possible distortions of oil prices. But these are issues which enter the stage
preferentially after the flaws of conventional theory have been exposed. Those flaws can include the failure,
under the lens of conventional theory, to understand the reasons for higher oil prices.
Dynamic efficiency is a property of capitalism which mainstream analysis mostly fails to consider. As
shown by Milonakis and Fine (2010), orthodox economics’ focus is on static market transactions, leaving
history and production outside. Of a static nature, the efficiency of market transactions is called of the
“ricardian” type. On the other side, taking into account history and time, there is a dynamic type of
efficiency which is called “schumpeterian” (Jessop, 2005, p.121). Behind that is Schumpeter’s - which
builds upon Marx - account of the urge to innovate in order to perceive extraordinary rents as the main
engine of economic development. Innovation, according to Hill and Myatt (2010), is “the one thing which
capitalism is good at” (132). Oil prices have a direct link with dynamic efficiency. When oil prices are high
(low) there is an incentive (disincentive) for oil companies to engage in projects with higher complexity or
with a higher technological content. Higher oil prices also incentive oil companies to invest in secondary
and tertiary forms of oil field recovery, which also spurs innovation. Another account of dynamic efficiency
is that of Victor (2008) to whom dynamic efficiency is a property related to the passage of time. In his
fashion, the question to be answered would be how oil prices affect the inter-generational distribution of
energy resources. Is the dominant form of “finding” oil prices an appropriate measure of allocating scarce
oil and gas reservoirs along the centuries?
8
In an interest study, Xiaoyi and Haichun (2011) find that between 2002 and 2005 no more than five percent of the price increase
in the real oil price was induced by China’s demand shocks. According to them, when the oil price spiked in 2008, China’s
demand shocks actually lowered the oil price from its linear trend.
A second form of social and distributional efficiency which can be attached to the pricing of oil is a type of
social and distributional efficiency. In mainstream economic analysis the equity goal is always subservient
to the efficiency goal. There is a trade-off between equity and efficiency, in such a way that transferring
income between people is like transferring water in a “leaky bucket” (Hill and Myatt, 2010, p.11). Following
Crouch (2011), the distribution question in mainstream analysis is resolved through the “trickle down”
principle, in which an inequitable distribution can be said to be more suitable for the society as a whole9.
Sen’s (1999) account of development is the definitive guide towards the comprehension that there is also a
type of social efficiency that influences economic efficiency. People not being able to exert their social
liberties, such as health care and education, prevent them from exercising their economic liberty, which can
be worse for the society as a whole. In this context, Dymski (2010) uses the expression “social efficiency”.
What concerns oil, in a recent book Bridge and Le Billon (2012) have shown that one of the main tasks of
impending world oil governance is to regulate distributional issues concerning price volatility, the ecological
costs of the burning of fossil fuels and the question of who gets what from economic development led by
natural resources. Thus, what concerns high oil prices and the described “social and distributional
efficiency”, two questions can be risen. How does the distribution of oil rents between small importing
countries (such as the Dominican Republic10) and large exporters (such as Saudi Arabia) affects the
economic development of the former, reducing its’ inhabitants capacity of transforming social liberties in
economic liberties? A second question concerns changing distribution, for instance, inside the United States.
Rising products prices affect proportionally poorer people, thus transferring income to oil companies.
A third type of efficiency which can be discussed in the wake of rising oil prices can be named “green
efficiency”. It dialogues with the issue of how higher prices have been giving signals towards an energy
transition in which cleaner fuels will play a larger role. Those signals are confusing. On one side, higher oil
prices - but also concerns with energy security -, have been prompting a shale gas revolution in the United
States and have been augmenting the viability of renewable liquids elsewhere. On the other side, due to the
profitability of the oil business, one might question whether high oil prices have successfully induced oil
companies to invest in future energy technologies in a satisfactory degree. For instance, recent investments
in tar sands show otherwise. In this context, Ploeg (2011) shows that a Hotelling approach to market
transition towards renewable energy has mostly failed. For the author, this opens space for the design of
powerful and intelligent public policies and taxes directed towards encouraging the energy transition.
Pascual and Zambetakis (2009, p.10) argue that volatile oil and gas prices and the actions that must be taken
to address climate change will drive the rise of nuclear proliferation. Higher energy and carbon prices will
make nuclear power a more attractive option in national energy strategies. If fossil-fueled transportation
relies on very inefficient motors, following Georgescu-Roegen and Daly nuclear energy enters the energy
system with low entropy and leaves it with an extreme degree of high entropy, as in the limit the disposal of
nuclear waste is still an open question (Burkett, 2009, p. 144-5). High entropy also concerns oil, as its
burning creates waste in the form of greenhouse gases with catastrophic effects.
Finally, it is possible to analyze how this supposed efficiency dialogues with the efficiency in other markets.
One of the conditions for efficiency in a general equilibrium model is the existence of complete markets.
That is, it demands the existence of derivatives and futures markets. Furthermore, the spirit of general
equilibrium is that markets are deeply intertwined. Under the first welfare theorem it is very easy to show
that a seemingly unjust allocation of resources is efficient, even amongst interrelated markets. Nevertheless,
9
Fiani (2011) is very critical of this account that equity is subservient to the efficiency goal. He does that by questioning the
concessions made by mainstream analysis in the first and the second welfare theorems, According to the first welfare theorem, a
given allocation of resources is the most efficient when it is impossible to make someone better off without making someone
worse off, which in theory can justify very unjust allocations. To him, the possibility of returns of scale affects the necessary
condition of a great number of buyers and sellers for general equilibrium to result in an efficient allocation. According to the
second welfare theorem, a given allocation can be bettered through subsidies on rent, not on prices. For Fiani (2011), the given
allocation of resources (including subsidies) is impossible of attaining because, with increasing returns, companies would expand
their production to levels superior to that allocation, thus making an equilibrium of supply and demand unattainable.
10
A 2008 report by the Dominican Government has shown that from 2004 to 2008 the country’s oil bill rose from 7,8% to 10,6%
of its GDP. As a result the country, which relies heavily on oil products to generate electricity, from 2007 to 2008 the country’s
energy subsidy rose from 7,6 to 11,1% of its GDP, while its combined expenditure with health and education fell from 19% to
17,1% of its GDP.
taking into account the existence of a “social efficiency”, it can be argued that this interconnectedness
between oil and other markets significantly worsens the situation of many despite of “trickle down”
promises. According to Stevens (2005), the decisions to trade paper barrels are often influenced by what is
happening to other elements in the financial portfolios which have nothing to do with oil markets, such as
commodities, equities, carbon, the weather, and so on. For Mabro (2008), a rational objective for traders
which deal with oil is to try to optimize the performance of this portfolio, in a way that a non-oil factor can
influence oil price formation. Thus, Qiang and Ying (2012) argue that the crude oil market occupies the
core position in the whole chain of commodity markets. Its volatility spillover effects on other commodity
markets were relatively greater than that of other markets on crude oil markets. In some countries it affects
significantly, for instance, the electricity prices, which have important triggering effects on the economy as a
whole (CLÔ, 2000), having important effects on distribution. The result is that higher oil prices might have
been indirectly worsening “social inefficiency”. This is especially true in food commodities markets, which
opens space to the discussion whether speculation with that type of commodity should be allowed at all
(ZIEGLER, 2012).
Conclusions
The debate about the efficiency of oil prices proves surprisingly complex. In this debate dominant economic
theory – whose proposal is to offer a univocal answer to all instances in which it claims itself capable of
determining prices in a supposedly efficient manner, - is aided by the realpolitik of top dog capitalism. It is
no longer necessary to provide such a holistic response, since in times of globalized oil exchange, what is
relevant is to maintain the business’ profitability, something which is matched through the existence of
dynamic centers in which supposedly efficient trade takes place. However, this pragmatic narrative also has
a fragile side, as heralds the decline of WTI as the most important benchmark in the American continent. It
is in this space of contestation - not only of the efficiency of prices, but also of theory - that alternative
interpretations of the efficiency of oil and products prices arise. With prices supposedly being artificially
high, it is possible to claim that efficiency does not have to deal solely with trade. Capitalism’s main
“talent”, which is innovation, also dialogues with a different type of efficiency that concerns directly the
industry, namely dynamic efficiency. For innovation in the oil industry, prices matter. Oil prices can also
affect the development of human capacities, which behooves a third type of efficiency, social. The way
prices are determined can also have an impact on the field of concerns with sustainability and the
environment. The information contained in oil prices may not always be efficient in terms of the transition
towards a more sustainable energy mix. Finally, investors' appetite for commodities such as oil has
devastating effects on markets that are forcibly intertwined, to such an extent that it is discussed whether or
not a ban should be placed on speculation in food commodities (ZIEGLER, 2012).
Due to its complexity, in the course of this work it was not possible to give a systematic treatment to another
type of inefficiency which derives from the fact that the described market approach does not compute
appropriately all of its negative externalities. The operation of the world oil market, very reliant on Middle
Eastern exports, has systematically relied on American military expenditures applied to securing the oil
transportation conduits. According to O’Hanlon (2009), in 2009 these could have ranged from $50 to $150
billion. Nevertheless, this does not mean that the entire sum was spent solely on the protection the oil
industry. On the other side, human and material costs involved in conflicts in which oil was a major concern
do not seem to have been considered in the appraisal of oil markets’ efficiency. Although very reliant on the
predicaments of free markets, sometimes oil market participants do not hesitate to promote military
responses, which is very odd. In a rather curious way, the path dependence described in this paper engenders
another type of path dependence in the geopolitical and military scenario, like an accompanying Russian
doll. It is non-deterministic because nothing guarantees that the United States will be willing in the future to
guarantee its access to oil through its military might.
Assuming that oil prices may after all not be completely efficient, one can inquire about what kind of
institutional development has taken place in the industry in the last four decades. Markets were assigned by
States with the mission of taking care of pricing, presumably to the detriment of the latter. However, this
commission went far from having achieved to construct a frictionless path. The defender of orthodoxy will
argue that the reforms were not radical enough. Nevertheless, it is extremely implausible that the utopia of
Liebovitz and Margolis (1995) can ever be fulfilled. The construction of this trajectory did not occur through
deliberate and calculated multiplication of stem cells which, waiting to be unleashed, right from the
beginning carried the DNA of efficient markets. The actors who negotiated the institutionalization of pricing
institutions from the beginning on were involved in an intricate geopolitical and geo-economic game. They
were not given to arbitrate an optimal path from the start on. Rather, changes were always concerted at
strategic moments. This includes the entry of new players with the power to influence those decisions.
In this sense, the global governance of oil pricing, according to Bridge and Le Billon (2012), was always
connected to the attempt by strategic actors to impose vested economic and geopolitical interests.
Nevertheless, the institutionalization of the decision to hand over pricing to the market could not be
completed without the consent of participating oil companies, refiners, traders, producers States, and so on.
It was this consent that increased the returns of the chosen path, thus seemingly locking it in. In this sense, it
is argued that the non-deterministic path dependence model as defined by Ebbinghaus (2005) and
sophisticated by Streeck (2009), Streeck and Thelen (2009) and Streeck (2010) can explain the pricing
changes that took place in the world oil market, which are ulteriorly reflexive. This model provides for the
possibility of various shades of change in different countries – countries and companies still have degrees of
freedom to negotiate their adhesion to the market or to liberalize their own products markets - as well as the
possibility of path departure. Following Bridge and Le Billon (2012), what is missing is that the global
governance of issues that concern the industry - reducing price volatility, the balance between supply and
demand, the negotiation of environmental losses and the balancing of economic development led by natural
resources -, takes place under more democratic conditions. From the analytical perspective of path
dependence, in its non-deterministic version, this type of change is possible, for it is endogenous. If
democratic global oil governance were attainable probably one would speak of some degree of path
departure. There are no utopias, as dominant actors continue to have influence. But it is possible to believe
that the pricing of oil through the market - which arguably constituted a major breakthrough - may as well
start to accommodate concerns over justice and social and economic development. For this to happen, the
voice of the voiceless must start to be considered.
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