The Future World Oil Market: State of Nature or Social Contract?
[This is a comment on an article by Mary Ann T茅treault, published in the Oxford Energy Forum n掳 39,
oct. 1999, entitled "The philosophy of upstream reorganisation". ]
By Pierre No毛l
Institute for Energy Economics and Policy
University of Grenoble (France)
noel@iepe.upmf-grenoble.fr
Mary Ann T茅treault develops a very interesting interpretation of the emerging new
relationship between international oil companies and Middle East producing countries.
The original intellectual tools she handles00oncepts drawn from the European political
philosophy tradition00llow her to argue as follows: (1) the oil market left to itself00/span>
whether participants are states or firms00ehaves like a Hobbesian "state of nature"
often resulting in a situation damaging to each participant; (2) to deal with it, the
international oil community has historically relied on different types of organisations, but
these social contracts or "republics"00s Tetreault sees them00ere inherently unstable
since they rested on too narrowly defined interests; (3) the rationale behind the possible
return of oil companies to the richest Middle East countries is the search for new
"international oil republics" able to "offer greater security and higher profits for all the
good republicans among them".
The market as a state of nature, revisited
Let us start with a discussion of the concepts themselves. How are we to understand the
idea that the market is a state of nature ? It is disputable that the way classical
philosophers imagine the cohabitation between individuals in the state of nature fits that
of actors engaged in an economic activity. Indeed, at the very core of the social contract
political theory00hether in the liberal Lockean tradition, the absolutist Hobbesian one,
or the Rousseauiste critique of the latter00s the idea that a sovereign power is required
as a prerequisite to any lasting collective order. What about the market? The order
emerging out of the market process does require such an authority, powerful enough to
enforce contracts and to "sanctify" property rights. It is clearly shown from Adam
Smith's Wealth of Nations , to contemporary neoliberals such as Friedrich Hayek,
Ludwig von Mises, and political philosophers such as Robert Nozick. The market
process, even for the arch-free-marketers, cannot take place in a state of nature.
But M.A. T茅treault still has a point: we can infer (e.g. from the two savages' hunting
party in Rousseau's On the Origin Of Inequality ) a less tragic version of the state of
nature. The problem associated with the lack of sovereign authority is no longer one of
civil war and peace, but one of coordination between individuals engaged in a collective
action. Had Rousseau's hunters been bound by a "social contract", they could have
directed their individual efforts to a more rewarding collective result; the defective
coordination arises from unlimited freedom of action. Arguably, a market may here be
seen as a "state of nature", as opposed to an organisation where individuals are under
contract 00.e. bound by a set of rules designed by reference to a collective goal. (French
2
sociologist Raymond Boudon has suggested such a qualification of the market as a state
of nature; see his Unintended Consequences of Social Action , Macmillan, 1982.) But if
we accept such a qualification, two points should immediately be made:
- Many such "states of nature" persist once the political community has empowered a
sovereign authority00hen a social contract has taken the collective life out of the
(Hobbesian) state of nature. In fact, such "states of nature" are a commonplace
feature of modern social life. The innumerable producers competing on, say, the
market for baguettes in Paris, interact with each other in what T茅treault and Boudon
would call a "state of nature": no authority ensures that the behaviour of any one of
them remains compatible with the interests of any other, let alone with the common
interest of the bakers as a group.
- Those "states of nature" are widely seen as beneficial to the society and the
economy. The only task of an antitrust authority is to make sure "states of nature"
prevail and are not discreetly replaced by "social contracts". For the other name of
T茅treault's "state of nature" is the competitive process . Of course, economic agents
often (always?) find it hard to live in a "state of nature"; unfortunately that is
precisely the reason why society wants them all to remain in such a state. Adam
Smith's invisible hand , far from neglecting that the market is a state of nature00s
M.A. T茅treault seems to imply00s based on it.
The idea that the market behaves like a "state of nature" can only be understood with
reference to the second acceptation00he sociological one, so to speak. But to contend
that such a "state of nature" is damaging and should be replaced by something else is not
correct. It borrows the pejorative aspect of the political state of nature, which refers to
something very different00he war of everyone against everybody, in Hobbes' words.
Behind these unusual words, as we shall now see, lies the common debate about
competition in the oil market.
The competitive process: between constraint and emancipation
The history of the oil market00ven before it became international00an be viewed as a
never-ending contest between the efforts of participants to enter into some form of
"social contract", and the natural drive towards a "state of nature". The former has
historically prevailed, to such a point that many have argued that competition is not
sustainable in the oil industry00ainly because of the costs structure00nd that
producers engaging in joint industry planning perform a task of int茅r锚t g茅n茅ral . Among
them is Paul Frankel and other economists from the business, as well as many
governmental and pro-OPEC analysts from 1970 onwards. M.A. Adelman00ith a few
others00as spent an entire academic life demonstrating that competition is not only
possible but highly desirable00t least to final consumers00ven if the competitive
process has indeed often been constrained.
Since the end of the 1970s (or early 1980s), the market process seems to be winning its
old contest against planning. Few would deny that it is now firmly established in the
driving seat; competition is the prime mover of the industry dynamics. Yet fifteen years
of market process dominance have left us with a far from competitive world oil market.
The reason is that a handful of producers are still loosely bound by a "social contract"
dedicated to market control. The quota system is dead, along with the formal cartel; but
3
the prize is high enough to make unilateral restriction rewarding, and to allow some
collective actions like the one we are currently experiencing. The result is a market more
erratic than ever, where periods of rapid move of prices toward costs alternate with
sharp but short-lived upward swings.
In the late 1980s and early 1990s, many were claiming a new age in international oil
relations, one of far-reaching cooperation rather than confrontation, of "constructive"
dialogue rather than "destructive" pursuit of self-interest. Many saw the downstream
investments of national oil companies from OPEC countries as a first step toward this
new oil order. Indeed, vertical re-integration was often perceived as a prerequisite to the
coming of an 芒ge d'or of soft-planning, bringing comfort and stability to everyone
involved.
Nothing like that really emerged and there are now clearly two different sides in the oil
industry. On one side is a highly competitive market where international oil companies
and landowners00ostly sovereign states00ompete for market shares, rents, reserve
growth and replacement. On the other side are a few producing states acting as both
landlords and entrepreneurs, with large, low-cost reserves and a strong short-term
interest in preventing price to shrink toward costs. The bigger the first group becomes,
the harder the life for the second group. As more and more actors interact in a "state of
nature", the task of would-be "social contractors" gets more difficult, and its result more
uncertain.
This is the context in which the companies could be invited back to invest in some of the
Middle-East countries. There is, as I understand it, only one alternative deserving
attention: will those states tend to become mere landowners entering the competitive
game, privatising their NOCs and offering acreage to international competitors? Or will
the door be only half open, with companies signing agreements that will allow host
countries to accomplish their hard task of monitoring the market? The first solution of
the alternative would imply a progressive move toward a competitive world oil market,
with diminishing rents as price gets closer to costs. The second one would mean a
strained status quo. Of course, there are many possibilities between these two, but the
underlying logic would be the same. The key question being whether00nd to what
extent00he competitive process in the world oil market is constrained or emancipated .
The myth of soft-planning
Hence I find it hard to understand M.A. T茅treault's idea that properly designed
arrangements between oil companies and the countries of the Middle East, because they
would be "more representative republics", would allow "the survival of competition as a
spur to efficiency", while offering "an as-yet-untried avenue toward industry stabilisation
in a period of market turmoil." Her concept of "republic of hydrocarbon" as opposed to
the "Hobbesian state of nature" the market is supposed to be, is reminiscent of the soft-
planning idea00n short: competition is so hard a state to live with that one shall find a
way of rationalising the market, with common interests prevailing over the pursuit of
self-interest.
But is there not here a piece of the "oil mythology" we should be ware of? The historical
conditions that gave rise to this idea have passed. The monitoring of the American
market during the interwar period took place under the auspices of authorities with
4
police power and a sovereign federal authority performing a coordination task. (Note
that the politics of the proration was so suffused with vested interests lobbying and
corruption that it had little in common with T茅treault's "Kantian republic", even if it was
certainly welcomes by most producers.) The system of the majors 00he other historical
reference of the rationalisation myth00ested on a few conditions that will never be
found again: country-wide concessions in all the most favourable areas; joint ownership
and management of major production affiliates; vertical and horizontal integration, both
financial and operational; partial exemption from antitrust laws in downstream activities,
etc00 perfect "social contract" not even sufficient to prevent the eventual emergence of
competition.
The market we now live in has so many participants, is so profoundly de-integrated, so
marked by globalisation, and so influenced by the liberalisation of oil regimes everywhere
in the world, that it is impossible to imagine an alternative to competition as the prime
mover of world oil in the decades to come. And in oil like anywhere else, competition is
a process by which the economic floor to price is discovered. The question is whether
some OPEC governments00robably helped by non-OPEC ones, and perhaps supported
by the U.S.00ill be able to constrain the development of the competitive process, and
to what extent. One can imagine they will. Big oil companies anticipate they will not:
would current industry consolidation have occurred if top managers had believed 20
dollars was the rule and 10 dollars an accident?
*
The reopening of the Middle East subsoil to private investment, depending on practical
modalities, may make little difference with the current situation of the world oil market.
But it is difficult to see how it could re-empower OPEC to effectively control the
market. It is also hard to imagine how it could be the basis for an alternative to the
continuing expansion of the competitive process. The "as-yet-untried avenue toward
stabilisation" may finally lead to more competition, hence lower prices.
download The Future World Oil Market: State of Nature or Social Contract?
