The first report applying our new economic framework (developed in our first series of reports) to specific market contexts, in this case, the oil market (pdf, 17 pages). Details below, with a link to a downloadable pdf table of contents.
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The purpose of this first report in our new, second series is to shed light on the dynamics of the oil market over the last several years and, in particular, the precipitous and unexpected fall in oil prices in the last quarter of 2014 and the prolonged uncertainty and market turbulence since. We begin by setting out a stylized model of the oil market and the nature of economic coordination prior to an assumed technological change. We then demonstrate how a particular form of market-driven technological change can lead to what we have previously termed “market breakdown”. Market breakdown is an unexpected abrupt decline in the network homogeneity of a market or, in other words, a collapse of the market consensus. It is the manifestation in seemingly stable markets of previously hidden instability and embedded disorder. We believe that this dynamic best characterizes the volatility of oil market in recent years. While the specific context is the oil market, our analyses of the processes of economic coordination and subsequent discoordination also have implications for other commodity markets. As is typical with our reports, our analysis also highlights shortcomings of mainstream economic theory and has important implications for policy — in this case, antitrust policy.
The New Economics of Order