City Research Online City, University of London Institutional Repository Citation: Gkanoutas-Leventis, Angelos (2013). The transformation of the oil market: A study of financialisation through crises. (Unpublished Doctoral thesis, City University London) This is the draft version of the paper. This version of the publication may differ from the final published version. Permanent repository link: https://openaccess.city.ac.uk/id/eprint/2994/ Link to published version: Copyright: City Research Online aims to make research outputs of City, University of London available to a wider audience. Copyright and Moral Rights remain with the author(s) and/or copyright holders. URLs from City Research Online may be freely distributed and linked to. Reuse: Copies of full items can be used for personal research or study, educational, or not-for-profit purposes without prior permission or charge. Provided that the authors, title and full bibliographic details are credited, a hyperlink and/or URL is given for the original metadata page and the content is not changed in any way. City Research Online: http://openaccess.city.ac.uk/ [email protected] THE TRANSFORMATION OF THE OIL MARKET. A STUDY OF FINANCIALISATION THROUGH CRISES Angelos Gkanoutas-Leventis A Thesis Submitted in Fulfilment of the Requirements for the Degree of Doctor of Philosophy. City University London, UK Department of International Politics. July 2013 1 TABLE OF CONTENTS ACKNOWLEDGEMENTS ............................................................................................................................ 8 DECLARATION ............................................................................................................................................ 11 ABSTRACT ..................................................................................................................................................... 12 INTRODUCTION .......................................................................................................................................... 14 METHODOLOGY ............................................................................................................................................... 23 THE HISTORY OF THE OIL MARKET UNTIL THE 1970S ........................................................................... 25 PART 1 .............................................................................................................................................................. 31 OIL AND FINANCE: A CONCEPTUAL FRAMEWORK ................................................................. 31 1 APPROACHES TO FINANCIALISATION................................................................................................... 31 1.1 PEAK OIL ................................................................................................................................................................... 42 2 THE ANATOMY OF FINANCIALISATION ................................................................................................ 50 2.1 SYSTEMIC APPROACHES TO FINANCIALISATION ................................................................................................. 55 2.2 INSTITUTIONAL APPROACHES TO FINANCIALISATION ...................................................................................... 61 3 FINANCE AND THE OIL MARKET ........................................................................................................... 67 3.1 ECONOMIC FUNDAMENTALS .................................................................................................................................. 69 3.2 BEHAVIOUR AND EXPECTATIONS .......................................................................................................................... 77 3.3 TECHNOLOGY AND REGULATION ........................................................................................................................... 84 4 THE FINANCIALISATION OF THE OIL MARKET .................................................................................. 90 4.1 INDEXES ..................................................................................................................................................................... 95 4.2 ACTORS ................................................................................................................................................................... 101 4.3 PERFORMATIVE CYCLE......................................................................................................................................... 114 4.4 THE FOUR ACTOR STRUCTURE ........................................................................................................................... 129 PART 2 ........................................................................................................................................................... 134 THE THREE PHASES OF OIL FINACIALISATION ..................................................................... 134 5 THE NEW OIL MARKET AND THE MACROECONOMY .................................................................... 134 5.1 TRACING FINANCIALISATION .............................................................................................................................. 143 6 EARLY FINANCIALISATION (1989–1999) .......................................................................................... 147 7 LOW FINANCIALISATION (1999–2003) .............................................................................................. 162 8 ADVANCED FINANCIALISATION (2002–2008) .................................................................................. 182 PART 3 ........................................................................................................................................................... 208 FINANCIALISATION THROUGH CRISES ...................................................................................... 208 9 CRISES AND THE OIL MARKET ........................................................................................................... 208 10 THE FINANCIALISATION OF THE OIL MARKET............................................................................. 217 10.1 ECONOMIC FUNDAMENTALS (1989–2010) ................................................................................................ 217 2 10.2 BEHAVIOUR AND EXPECTATIONS (1989–2010) ........................................................................................ 222 10.3 OIL SHOCKS, TECHNOLOGY, AND REGULATION (1989–2010) ................................................................ 225 CONCLUSIONS........................................................................................................................................... 232 FURTHER RESEARCH ....................................................................................................................................................... 243 BIBLIOGRAPHY ........................................................................................................................................ 251 LIST OF INTERVIEWS ....................................................................................................................................................... 331 3 TABLE OF FIGURES1 FIGURE 1-1 NON-OECD OIL CONSUMPTION AND GDP .................................................................................. 33 FIGURE 2-1 US OIL INTENSITY OF PRODUCTION .............................................................................................. 33 FIGURE 3-1 1862–1979 OIL MARKET TRIANGULAR STRUCTURE .............................................................. 41 FIGURE 4-4 2011 TARGET WEIGHTS OF THE DOW JONES–UBS COMMODITY INDEX .............................. 96 FIGURE 5-4 COMMODITY FUTURES AND OTC VOLUMES ................................................................................ 98 FIGURE 6-4 COMMODITY PRICES ......................................................................................................................... 99 FIGURE 7-4 WTI AVERAGE OPEN INTEREST BY NON-COMMERCIAL AND COMMERCIAL PARTICIPANTS ........................................................................................................................................................................ 106 FIGURE 8-4 COMPOSITION OF THE RECORDED OIL FUTURES NYMEX ...................................................... 108 FIGURE 9-4 NON-COMMERCIAL POSITIONS IN WTI NYMEX OIL FUTURES ............................................ 109 FIGURE 10-4 SAMPLE OF PRIMARY-COMMODITY-DERIVATIVE DEDICATED FUNDS DURING THE PRIMARY COMMODITY BOOM, 1997 TO 2008 ........................................................................................................ 114 FIGURE 11-4 REINFORCING BEHAVIOUR BETWEEN SPOT AND FUTURES MARKETS ............................... 118 FIGURE 12-4 OIL FUTURES AND SPOT PRICES ................................................................................................ 120 FIGURE 13-4 OIL-MARKET SPARE CAPACITY AND WTI CRUDE OIL PRICE .............................................. 121 FIGURE 14-4 REAL OIL AND GOLD PRICES, 1970–2008 ............................................................................ 123 FIGURE 15-4 COPPER FUTURES PRICES (THREE MONTHS BUY) AND ‘REAL’ COPPER PRICES IN US$, 1999–2009 ................................................................................................................................................ 124 FIGURE 16-4 CRUDE LIGHT