FINANCIALIZATION OF OIL: A GEOGRAPHICAL PERSPECTIVE ON OIL TRADING AND PRODUCTION NG LI NA (B. Soc. Sci. (Hons.)), NUS A THESIS SUBMITTED FOR THE DEGREE OF MASTER OF SOCIAL SCIENCES DEPARTMENT OF GEOGRAPHY NATIONAL UNIVERSITY OF SINGAPORE 2010 ACKNOWLEDGEMENTS This thesis has materialized, as other commodities would, with the support of many people throughout its production process. Indeed, no amount of thankyous would suffice in expressing my deepest appreciation to all who have impacted on this dissertation and my academic journey. However, I remain extremely thankful for this page. This page, positioned right at the start (i.e. front), acknowledges the vital contributions of many that have enabled the critical beginning and developments of my research. In completion of this thesis and the culmination of my intellectual endeavours in NUS, I would like to express my sincere heartfelt thanks and gratitude to the following people:  I am extremely honoured to have worked under the supervision of Prof Henry Yeung. Thank you so much for your guidance, encouragement and your belief in me and my work. Till today, I struggle to address you by your first name even after you have requested for graduate students to do so. You are my teacher, a great mentor and a successful researcher whom I deeply and dearly respect. I have learnt a lot from you and I am truly grateful for your time and dedication as my supervisor for my Masters. Thank you!  All my respondents for their valuable time and patience in sharing their knowledge and insights with me.  Special thanks to Mr. Al Troner, Mr. James Tham, Mr. John Knight and Ms. Julie Teo S.C. who all extended their generous time and support to this thesis and myself.  A big thank you to the faculty members of the Department of Geography, NUS, who made (and still making) Geography a fabulous discipline through my undergraduate and post-graduate years. In particular, A/P Tim Bunnell, Prof Lily Kong, Dr. Lisa Law, Dr. Linda Malam, A/P Natalie Oswin, A/P Victor Savage, Prof. James Sidaway and Prof. Brenda Yeoh for all their invaluable teachings and kind encouragements.  The excellent support of the administrative staff at the Department who has been extremely understanding always. Loads of thank-yous to Pauline for her kind attention to all administrative matters and stress-relieving chit-chats.  The faculty and staff members of the University Scholars Programme, especially Dr. Lo Mun Hou and Dr. Yew Kong Leong who have broadened my academic horizons during my undergraduate years. i  My two markers whose time, critiques and insights on this thesis are deeply appreciated.  All my friends whom I have met and learnt a lot from in Geography, especially Songguang and Chih Yuan, Honours classmates [Jacqueline, Syaifullah, Weijian, Shuping, Xiaohui, Daryl and Simone] and fellow postgraduates [Jiajie, Fred, Deborah, Serene, Jianhao, Aidan, Liu Yi, Chen Rui, Liu Song, Rana, Xiao Lu, Lishan, November, Kanchan and Diganta]. Thank you all for sharing those moments of laughter, tears and complaints and making academic life “happen(ing)” as it should be.  My dearest friends especially the Biz Ad gang [Chamila, Sujen and Wan‟er], Huixia and the rest of the JC pals and Daphne. Thank you all so much for being there all these while with caring and encouraging SMSes, phone calls and get-togethers.  Lastly, I dedicate this thesis to Daddy, Mummy and Glenn who have sacrificed so much taking care of me and accepting me for who I am all these years. ii TABLE OF CONTENTS Page Acknowledgements i Table of contents iii Summary vii List of Tables ix List of Figures x CHAPTER ONE: INTRODUCTION 1.1 Introduction: The US$ 147 oil indictment: Fundamental demand-supply 1 and the financialization of oil 1.2 A financial geographical perspective on oil trading and production 5 1.3 Organization of Thesis 11 CHAPTER TWO: GEOGRAPHY OF FINANCE AND COMMODITIESLITERATURE REVIEW AND CONCEPTUAL FRAMEWORK 2.1 Introduction 12 2.2 Geographies of finance: A critical review 13 2.3 Geographical research on commodities: A critical exposition 22 2.4 Uncovering the nexus of finance and commodity production: a sympathetic critique of the existing literature 29 2.5 Conceptualizing oil trading: Expounding the significance of finance in global production networks 32 2.5.1 Unpacking the dynamic processes of the oil GPN–from production to trade 33 iii 2.5.2 Interdependence in the GPN of oil 39 2.5.3 Grounding interdependence: Power, embeddedness and value creation in oil trading 42 2.6 Concluding comments 47 CHAPTER THREE: RESEARCH METHODLOGIES 3.1 Introduction 48 3.2 Negotiating the „field‟: Networked connections, trust and power 49 3.3 Field techniques 52 3.3.1 Semi structured interviews 53 3.3.2 Corporate events: Seminars and training session 58 3.3.3 Discourse and textual analysis 59 3.4 Concluding comments 60 CHAPTER FOUR: GEOGRAPHY AND NETWORKED NEGOTIATIONS: OIL PRODUCTION, TRADING AND BENCHMARK PRICES 4.1 Introduction 62 4.2 Geographies of oil production: From crude oil to refined oil products 63 4.3 Geographies of trading of material oil and benchmark pricing 67 4.3.1 Trading of material oil in Singapore: Spatiality and networked negotiations 70 4.3.2 The role of Platts: Circulation of market information and benchmark pricing in Singapore 73 4.4 Concluding comments 82 iv CHAPTER FIVE: UNCOVERING FINANCE IN THE GPN OF OIL: ‘THE END OF GEOGRAPHY’ OR GROUNDED INTERDEPENDENCE? 5.1 Introduction 84 5.2 Financing, financial oil trading and the financial market for oil 85 5.3 Hedging through oil derivative trading: Socio-spatial negotiations of exchanges and OTC transactions 88 5.3.1 Organized exchanges: The prevalence of CME and ICE 92 5.3.2 Over The Counter [OTC]: Networked negotiations and the advent of exchange clearing 96 5.4 Concluding comments 101 CHAPTER SIX: FINANCE AND SPECULATIONS: RE-VISITING THE SOCIO-SPATIAL NEGOTIATIONS OF OIL TRADING AND PRODUCTION 6.1 Introduction 103 6.2 Financialization of oil beyond hedging: Geographies of investment funds and hedge funds 105 6.3 The 2008 oil spike: The performativity of oil derivatives in the sociospatial dynamics of oil trading and production 108 6.4 Concluding comments 116 CHAPTER SEVEN: SUMMARY AND CONCLUSION 7.1 Summary 117 7.2 Implications of Study and Future Research 120 7.3 Concluding comments 124 v LIST OF REFERENCES 126 APPENDIX I 163 APPENDIX II 164 vi SUMMARY As oil prices began to escalate and skyrocket to a historical high of US$147 per barrel in July 2008, attempts to ascertain whether speculation or fundamental demand-supply imbalances became a focal point of contention in the media. This thesis seeks to shed light on this debate by examining the sociospatial dynamics of oil trading. Oil trading involves both the trading of material oil and oil derivatives. The trading of oil derivatives, predicated on the financialization of oil, is a critical process that involves hedging against price risk exposures incurred in the trading and production of oil. However, the financialization of oil has led to the development of speculative activities such as investment and hedge funds that have been noted to contribute to speculative trading. To understand the significance and impacts of the financialization of oil on trading, production and prices of oil, this thesis proceeds to analyze the processes and actors involved in the risk management and value creation of the global oil industry. As much as the trading and production of oil are dependent on oil derivative trading for price risk management, the process of oil derivative trading and financial services as a whole are, in turn, sustained by the needs of the oil industry. I propose how interdependence between these processes is deeply embedded within socio-spatial relations, information and knowledge networks and also grounded in distinct geographical locations such as Singapore. vii Furthermore, I proffer that oil prices should be fundamentally understood as influenced by mutual adjustments and effects, i.e. the interdependence, of both oil derivative trading and the trading and production of material oil. This research marks a humble contribution to the on-going academic perforations into the “black box of finance” (MacKenzie 2005) by examining the significance of finance within commodity production beyond the provision of credit loans to businesses and revealing how the separate fields of finance and commodities, more specifically commodity production, in economic geography do in fact intertwine. Keywords: Financialization, global production networks (GPN), Derivatives, Oil trading, Singapore viii LIST OF TABLES Page Table 1.1 Comparision between NYMEX futures volume and global exports and imports in 2008 3 Table 3.1 Field notes and reflections 49 Table 3.2 Profile of semi-structured interview respondents 54 Table 3.3 Corporate events attended 58 Table 4.1 Key geographies of production and corresponding major oil Firms 64 Table 4.2 World‟s largest refineries and corresponding locations 65 Table 4.3 Partial listing of firms involved in oil trading based in Singapore 71 Table 4.4 Major market players ( ≥ 3% participation by trade volume) in various crude and refined products MOC [from Jan-Jul 2009] 78 ix LIST OF FIGURES Page Fig. 2.1 A conceptualization oil networks and their relations with oil derivative trading 36 Fig. 2.2 Example of a generic netchain (Lazzarini et al. 2001 pp. 8) 40 Fig. 4.1 World proven crude oil reserves (end of 2008) 64 Fig. 4.2 Map of major trade movements of oil 65 Fig. 4.3 Map of major spot markets and benchmark zones 68 Fig. 6.1 The performativity of economics: a possible classification (MacKenzie 2006b:17) 111 x CHAPTER ONE: INTRODUCTION 1.1 Introduction: The US$ 147 oil indictment: Fundamental demandsupply and the financialization of oil As oil prices began to soar in early 2008, the rising oil prices have begun to hurt Singapore car drivers at the petrol pump, just as they are causing corporate costs around the globe to skyrocket as well. Indeed, oil underlies the economic metabolism of most countries in the world. As oil prices continue to escalate, the pressing question remains how high would oil prices go (The Straits Times 29/04/2008). In the midst of rife conjectures on oil price movements, oil price projections went through the roof with the Wall Street titan, Goldman Sachs Group Inc. predicting that oil prices would hit a high of US$150 to US$200 per barrel from 2008 to 2010. These steep prices were noted to be perpetuated by Asian, specifically China‟s economic development and increasing high consumption in preparations for the 2008 Olympic games. Oil supplies were reported being threatened by political and social unrest in the major oilproducing countries of Nigeria, Venezuela, Iraq and Mexico. Furthermore, falling U.S. dollars to which oil was a natural hedge against inflation also drove oil prices upwards (Bloomberg News 06/05/2008). Adding to the blustery of high oil prices is the notion of speculative trading. At the World Petroleum Congress on 30 June 2008 in Madrid, oil ministers of Saudi Arabia and Qatar blamed speculative activities in the oil markets to cause oil prices to surge beyond US$140 per barrel. This was refuted promptly by top representatives of oil majors such as Shell and BP who claimed that steep oil prices were 1 fundamentally led by demand and supply imbalances (Platts Oilgram Price Report 01/07/2008). As oil prices hit US$147 per barrel for the first time in history in July 2008, the clamour on whether demand-supply fundamentals or speculative activities had caused the oil price spike amplified. Within these discourses, there is an inherent difference in the spatial inflection between fundamental oil demand-supply and that of speculative activities. The demand-supply of oil dynamics that are often understood to be grounded in countries; whether the volume of oil produced and consumed by specific countries have caused demand-supply imbalances. Speculative activities, on the other hand, are marked by difficulties in grounding apparently invisible global investment and capital flows mediated through financial institutions such as investment banks, asset management firms and hedge funds. The ability to identify spatial locations of production and consumption of oil provides a concrete and material basis, as compared to speculative activities, in understanding the reasons behind oil price fluctuations. Although the determinants of oil price movements have much to do with perceptions about current and future demand and supply balances, they are also influenced by investor‟s optimization of returns from their portfolios of diverse financial instruments. This financial motive can be seen in how as Dan Gilligan, president of Petroleum Marketers Association, declared that (CBS news 60 minutes): 2 Approximately 60 to 70 percent of the oil contracts in the futures markets are now held by speculative entities. Not by companies that need oil, not by the airlines, not by the oil companies. But by investors that are looking to make money from their speculative positions. Table 1.1 compares the data on the global trade movements of oil in 2008 (i.e. crude and refined oil products exports and imports) which registered at 54,626,000 barrels per day to the volume of three main oil futures contracts traded on the New York Mercantile Exchange (NYMEX). The latter alone stands at 690,829,000 barrels per day. The trading transactions of oil futures contract have clearly outstripped the volume of material oil exported and imported globally by more than ten folds. Hence, rather than to fulfill consumptive needs, the trading of these futures contracts are likely underlined by speculative trading in search of greater financial gains. Table 1.1 Comparision between NYMEX futures volume and global exports and imports in 2008 NYMEX Product Light Sweet Crude Futures Heating Oil Futures New York Harbor RBOB Gasoline Futures NYMEX futures Total Total Global Exports and Imports Contract volume (daily average) 532,309 77,403 81,117 Minimum trading units per contract (barrels) 1,000 1,000 1,000 Total no. of barrels traded (daily ave.) 482,246, 000 77,403,000 81,117,000 690829 - 1,000 - 690,829,000 54,626, 000 Data sources: BP Statistical Review of World Energy June 2009 / NYMEX (CME) In this thesis, speculation is founded within the trading of oil derivatives or simply paper oil1. The pertinence of speculation has become very much a part 1 Paper oil is a common term used by traders that refers to paper contracts as per oil derivatives. 3 of oil trading and production and in affecting oil prices. Hence, with oil derivatives, the process of oil trading and production in the global oil industry has become more complex. This is especially so as prices from the trading of oil derivatives such as oil swaps do affect benchmark prices that are widely used to price material crude oil and refined oil products. As such, the complex processes and activities of the financialization of oil have been noted to “defy attempts to seek transparency and appropriate understanding” (Mabro 2006:20). Rather than to seek complete “transparency”, attempts in analyzing the dynamics of oil trading and production, would uncover some critical grounded insights on the oil industry and market. It is thus central to this thesis to elucidate the financialization of oil, as per oil derivative trading and speculative activities, by uncovering the actors and processes involved in the risk management and value creation of the global oil industry2 in Singapore. Singapore lies strategically in the global oil shipping and trading routes. This favourable geography has enabled large flows of transhipment and bulk breaking of oil cargoes that pass through Singapore. Two of the world‟s largest refineries that are owned by integrated oil companies, Shell and Exxon-Mobil are located in Singapore‟s offshore islands. Oil trading in Singapore is well supported by the presence of established financial services, government schemes and tax breaks 2 The global oil industry is basically delineated by three components: Upstream activities include exploration, acquisition, drilling, developing and producing oil and gas (i.e. exploration and production operations). Midstream activities are usually denoted by storage and transportation. Downstream activities are marked by refining, processing, marketing and distribution. 4 offered to traders who operate in its shores. Singapore also hosts the Platts benchmark price assessment that facilitates the determination of oil prices in the Asian region (Hong 2007). Many oil firms and corporate oil personnel are located in Singapore because its environment is conducive for oil trading and production businesses. This has given rise to a concentration of oil firms and also an established community of oil traders in Singapore. Furthermore, being located near to the demand markets of Southeast Asia, oil firms in Singapore are able to extend their businesses to the region as well. In all, Singapore‟s strategic location marks a befitting location for the study of the socio-spatial negotiations of oil derivative trading, speculative activities and the trading and production of material oil3. 1.2 A financial geographical perspective on oil trading and production On a broad level, this thesis seeks to contribute to the on-going academic perforations into the “black box of finance” (MacKenzie 2005) by understanding how finance is situated within commodity production beyond simply financing businesses. This approach draws together two separate but yet conjoined fields of study of commodities, more specifically commodity production, and finance in economic geography. As much as finance is itself an industry with distinct sociospatial negotiations grounded in global financial centres and cities such as New York, London, Tokyo, Hong Kong and Singapore (see Sassen 2002), its function and system remains fundamentally to provide financial services to users who 3 The term „material oil‟ refers to oil that is tangible and can be metabolized. In many of the interview quotations used throughout this thesis, the term „physical‟ (widely used in the oil industry) refers to oil in its real, material form. 5 require them. Hence, finance would be essentially embodied within other socio-economic processes such as production. Coe et al. (2008:275) have highlighted how finance is one of the “constituent parts of the overall production system”. Not only is finance a critical part of production, finance and the process of financialization are in fact sustained by the structure and strategies of global production (Milberg 2008). This thesis thus seeks primarily to contribute to the burgeoning literature on finance and commodity in economic geography by examining the socio-spatial negotiations of finance within the process of commodity production. This is the financial geographical perspective that I will adopt in accounting for the complex and interwoven geographies of oil as both a material and also paper-traded commodity. As networks have become “the foundational unit of analysis for our understanding of the global economy, not individuals, firms or nation states” (Dicken et al 2001:91), the process of oil trading will be analyzed on the basis of a network approach, specifically the global production network (GPN) framework, in explicating the linkages and power relations involved in the process of oil trading. The GPN approach, rooted in network ontology, has the capacity to incorporate a wide spectrum of actors, processes and geographies in engendering a comprehensive study of the sites that constitute production across the world. The GPN of oil has in fact been addressed by Bridge (2008a) who specifically analyzed the geographies of oil production from upstream extraction of crude to downstream refining operations and also that of oil consumption. 6 However, the process of oil trading, a central circulatory process that underlies these sites of production, remains obscure. The process of oil trading is delineated by two processes: the trading of material oil and trading of oil derivatives. The trading of material oil marks the buying and selling and the movement of oil cargoes upon settlement of trade transactions. This process is situated and mediated through specific sites of embedded networks such as that of Singapore and also proximity to other locations so as to facilitate trading decisions and strategies. As noted by Hudson (2008), space is integral to the biography of commodities, moving across varied sites of production, exchange and consumption as they flow around the capitalist circuit. With regards to the process of material oil trading, Singapore marks an important locus within these circulatory flows. On a similar note, the trading of oil derivatives, marked by the circulation of paper contracts, also exhibits distinct localities denoted by the prevalence of organized exchanges (i.e. Chicago Mercantile Exchange [CME] and Intercontinental Exchange [ICE]) and also sites of embedded networks such as Singapore for over-the-counter (OTC) private bilateral transactions (see Appendix I and II). To unpack further my key objectives, this thesis seeks to explore how the GPN approach can be extended to incorporate wider and also underlying processes such as that of finance, in contributing to “ …the analysis of the spatial creation, enhancement, and capture of value -- defined as surplus value and economic rent in different configurations of GPNS” (Hess & Yeung 2006:1200). 7 The financialization of oil involves the trading of oil derivative such as futures, swaps and options. Oil derivatives are financial contracts that derive their values and prices from material oil (see Appendix I). These financial contracts are then traded as would a material commodity. Hence, other than providing credit loans, finance, integral to the central production operations of the GPN of oil, involves the process of oil derivative trading. The trading and production of material oil depends on oil derivative trading for risk management; providing a hedge against the price risk 4 to which oil cargoes in transit and material oil produced in the future are exposed to. Conversely, the function of oil derivative trading is sustained by the need for managing price risk incurred in trading and production of material oil. Hence, rather than merely acknowledging that finance is significant to commodity production, the case of oil trading and production establishes how there is an interdependence between them. The conscious endeavour of this thesis thus complements one of the recent research developments in the geography of finance; financialization. As noted by Engelen (2008), financialization is a concept that has been widely addressed across different disciplines, embodying different theoretical underpinnings from structuralist to Marxist political economy to post-structuralist with a cultural slant. However, underlying these theoretical paradigms is the elucidation of the effects and impacts of finance on individuals, firms, society and global economy at large. 4 Price risk refers to the “risk of losing money as a result of price movements in the energy markets and is sometimes referred to as “market risk” (James 2007:2). 8 I pertain that financialization should be understood as a process in which entities become increasingly integrated into the financial markets. Furthermore, this study on financialization of oil with regards to commodity production not only extends beyond understanding how firms or individuals are increasingly integrated into the financial world, but also demonstrates how financialization is embodied within commodity production as well. Other than analyzing the interdependence of oil derivative trading and the trading and production of material oil with regards to risk management and hedging, the opportunities in gaining cash profits through speculative activities will be examined as well. Speculation provides liquidity where more actors, who are willing to buy risks that are sold by others, participate in the trading of oil derivatives. However, such speculative activities, aimed at value creation as seen in the financialization of oil as per investment funds and the aggressive oil derivative trading strategies of hedge funds, have been deemed to occur as a distinct and „detached‟ process from oil trading and production as a whole. With regards to MacKenzie‟s (2006a; 2006b) view on the performativity of economics, the performativity of oil derivatives remains rooted in the trading of oil derivatives. While the effects of the “performances” through oil derivative trading have caused oil prices to skyrocket as seen in the 2008 price spike, it remains difficult to ascertain the intentions of actors, whether they are trading oil derivatives for risk management purposes or speculating for monetary return. Thus, the performativity of oil derivatives pertains that oil derivative trading 9 should be understood as a process driven by various intentions that yield different outcomes. These intentions and outcomes, in turn, affect oil trading and production as a whole. Hence, oil prices remain essentially influenced by the mutual adjustments and effects of both oil derivative trading and the trading and production of material oil. I argue that speculative activities and their geographies, though distinct from those of price risk management, should be understood as part of the socio-spatial dynamics of oil trading. 10 1.3 Organization of Thesis This chapter has provided a general overview of the research aims and directions of this thesis. Chapter 2 proceeds with a critical review of selected literature in the geography of finance and commodities and an analytical framework adapted from Bridge‟s (2008a) GPN of oil. Chapter 3 addresses the methodological issues and reflections pertaining to this study, specifically on the power relations and politics in negotiating the „field‟. Chapter 4 highlights the production geographies in the global oil industry and uncovers the socio-spatial negotiations of material oil trading, specifically in the light of Singapore‟s Platts benchmark prices that are influenced by both the trading of material oil and oil derivatives. This chapter is followed by a critical analysis of the spatiality of oil derivative trading and its interdependence on the trading and production of material oil in Chapter 5. Speculative activities and their influence on oil prices, though marked by distinct geographies, reveal a need to ground them more concretely in the socio-spatial dynamics of oil trading and production as a whole. This analytical task is the main preoccupation of Chapter 6. Finally, Chapter 7 reviews and summarizes my geographical analysis of the dynamics of oil trading and production, evaluating the potential of economic geographical research in engendering a more comprehensive understanding of both financial and production processes. 11 CHAPTER TWO: GEOGRAPHY OF FINANCE AND COMMODITIESLITERATURE REVIEW AND CONCEPTUAL FRAMEWORK 2.1 Introduction This chapter evaluates the contemporary geographical research on finance and commodities. It proceeds to highlight the conceptual framework of oil trading and production that aims to instate the significance of finance as per the process of oil derivative trading in the GPN of oil. Research on the geographies of finance has focused on largely financial centres and operations rather than understanding finance as a „production process‟ that produces financial services and products (Grote et al 2002) or a service function in the economy. Although recent studies of financialization have sought to uncover the effects of finance on corporate management and everyday life, there remains more to be understood on why and how material assets are financialized and transformed into financial products or contracts. Geographical research on commodities is predicated on analyzing commodity production of mainly agro-food and industrial commodities and also the process of commodification of natural resources and in environmental management. I suggest how research on commodities can be extended towards other commodities, such as oil. Oil is a natural resource that undergoes a production process in becoming refined oil products. Furthermore, oil has been financialized into oil derivatives that are widely traded in the financial markets. This presents an avenue to address both finance and commodity concomitantly and, by doing so, contribute to the understanding of the dynamics of finance and 12 commodity production respectively. In my conceptual framework section, I seek to assess the socio-spatial interactions and relations between finance, specifically the process of oil derivative trading and the production and trading of material oil. This chapter will proceed with Section 2.2 that outlines the major research trajectories in the geographies of finance. An overview of geographical research on commodities will ensue in Section 2.3. Section 2.4 provides a critique of both strands of literature, instating how finance and commodity production can be researched in tandem. In Section 2.5, I propose that a study of oil trading conceptualized on the basis of Bridge‟s (2008a) global production network (GPN) of oil would elucidate the socio-spatial dynamics co-constituted through commodity production and finance. This approach sheds light on how oil derivative trading and the trading and production of material oil are not only interrelated but also interdependent. I seek to account for this interdependence by unpacking the power relations, embeddedness, value creation and distinct geographies inherent within the process of oil trading. 2.2 Geographies of finance: A critical review Finance, with its deep and extensive impacts on modern society, has been critically researched in contemporary academia. As the significance of distance and space are diminished by advanced information and communication technologies in modern global financial operation, geography is deemed to have become irrelevant, marking “the end of geography” (O‟Brien 1991). On the contrary, geographical and related social studies on finance have highlighted how 13 location, place and distinct spatial negotiations do matter in the world of finance. Leyshon (1995; 1997; 1998) in his progress reports provided reviews of the diverse studies on the geographies of finance and money from the mid to the late 1990s. Money is an integral part of finance; the financial system is central to management and circulatory flows of money and capital as deeply intertwined within the “new international monetary system” (Corbridge & Thrift 1994, Strange 1994, Clark 2005). However, other than money, research on finance has extended towards investigating on financial regulation and financialization of firms amongst other issues. The impacts of the recent 2008 global financial and economic crisis have exposed the existence of deep interconnections and relations between different spatialities, scales, individual actors and institutions within global finance (Aalbers 2009, French et al. 2009, Van Hulten & Webber 2009). In Geography, there are distinct and also various on-going contributions from economic geographers such as Clark, Leyshon, Grote, Hall and Wójcik that examine the geographies of finance and the effects of financialization through political and cultural economy approaches. The significance of geography in understanding finance can be seen in the following four major areas of research: financial regulation, financial centre dynamics, performativity and sociality of finance, and financialization. 14 (i) Regulation of finance The regulation of finance has been critically researched in view of declining state power in the developing financial world since the late 1970s (Okun 1970, Cohen 1977, Strange 1986, Williamson 1987, Gill & Law 1988, Cerny 1993, Stiglitz et al. 1993). Stemming from an International Political Economy (IPE) approach, these studies analyzed the changing role of the state and political relations of the international world economy. The significance and power of the state in financial regulation may seem to have diminished as local financial problems are often systemic crisis of a more global nature (Leyshon 1997). Hence, global governance structures and controls have been proposed to facilitate the regulation of financial activities and operations due to the “decentralized globalization” of finance. However, the viability and power of global mechanisms and institutions in regulating global finance remains limited (see Germain 1998; 2007, Tickell 2000, Henderson 2003, Brown & Cloke 2007). This is especially evident in the 2008 financial crisis as state policies and national institutions are integral in the management of financial downturn and also in formulation of post-crisis regulatory policies. Central banks and national government bodies have been at the forefront of and are held responsible for resolving credit problems in the recent 2008 financial crisis; the state remains an integral actor in bailing out financial institutions out of bankruptcy. However, other than the state and its institutions, the financial world of today is also highly regulated by “second superpowers” 15 such as private credit rating agencies, Moody‟s and Standard & Poor‟s. These private institutions analyze the creditworthiness of financial institutions, private corporate establishments and even the state of public finance (sovereign governments). As highlighted by Sinclair (2000, 2005), these “second superpowers” are institutions that are embedded knowledge networks (EKNs). The notion of EKNs pertains to how such “second superpowers” are deemed endogenous within finance and the global economy and are recognized as “legitimate rather than imposed entities by participants” (Sincclair 2000:489) such as banks, other corporate businesses and even governments. The power of such credit rating agencies lies in the influence of their analytical review reports which are highly utilized by both corporate and public sector. These analytical reports evaluate the financial performances of firms, institutions and even nations. The information and knowledge outputs from these private rating agencies are thus noted to possess a quasi-regulatory effect. Based on the paradigm of new institutionalism, premised on understanding the interactions between structures and institutions (see Martin 2000), the regulation of finance involves a myriad of global and centralized governance and also both private and public regulatory bodies. The regulation of finance is, therefore, an interaction and intermeshing of governance and institutional spaces at various scales and matrices of power. The complexity of spatialities and multi-scalarity of financial negotiations between actors and institutions in the global economy thus complicates the development and management of an effective regulatory system of global finance. 16 (ii) Financial centres and nodes Financial centres are major constituents within networks of finance. Since the early 1990s, research on financial centres has been focused on how the significance and hierarchy of cities and urban nodes in the global economy can be delineated by the presence and power of financial centres. This is because a financial centre is a mark of an established economic power. The presence of a strong financial centre attracts investment inflows and in turn, supports local, national and even regional urban development (see Thrift & Leyshon 1992, Hudson 1998a; 1998b, Beaverstock et al. 2007). Apart from the structural and institutional analysis of how financial centres are central to development and global competition, financial centres are also understood as socially constructed. These studies illuminate the inherent socio-cultural relations, networks and information flows within and surrounding financial centres (Thrift 1994, Thrift & Leyshon 1994, Leyshon 1997). Although research on ethno-Chinese banks and Islamic banking reveals how social relations and culture do matter in financial activities (Pollard & Samers 2007, Dymski et al. 2001, Dymski & Li 2004), financial centres and nodes are also no less socially and culturally embedded. This can be seen in how financial activities and transactions such as the success of firms‟ issuance of initial public offerings (IPOs) are „financial-centre biased‟; there is a marked preference for close proximity to financial centres as financial transactions are enmeshed within established culture, social and knowledge networks and secure legal systems. 17 Financial products and investments are also “spatially sticky” towards certain financial centres, with regards to the knowledge flows required in developing them and managing corresponding financial transactions. Financial transactions and flows are not entirely space-neutral and neither are financial centres all the same; financial centres are tiered (i.e. global, national, local centres) according to their functions that embody different scales of socio- spatial negotiations (see Clark & O‟Connor 1997, Engelen 2007, Grote 2007a; 2007b, Wόjcik 2009). The spatiality of financial centres and nodes remain central in the „virtualization‟ of global finance. Financial centres are not only concrete locations such as Wall Street in New York that embody of concentrations of financial activities. They are also underlined by socio-cultural interactions that weave back and forth between actual and digital space within the complex virtual, social and institutional networks of finance (Sassen 1997; 2001; 2005). (iii) Performativity and sociality of finance Research on the performativity and sociality of finance transcends macro geographies and structural analyses by adopting a cultural economy approach in analyzing the performances, knowledge flows and social interactions of finance. Feminist geographical studies have researched on the performativity of finance such as gendered and body politics of the negotiations of both men and women workers respectively in the largely male-dominated financial world (McDowell & Court 1994a, Halford & Savage 1995, McDowell 2001, Levin 2001). The notion 18 of performativity and sociality of finance (ie. the social and cultural processes of financial spaces, products and instruments) have been largely explored by social scientists from various disciplines such as sociology, geography and science and technology studies. This inter-disciplinary social science research on finance is known as the Social Studies of Finance (SSF). According to MacKenzie (2009), the SSF fundamentally echoes the material concerns of “social studies of science”. These „material concerns‟ refers to how financial markets are made up of physical artefacts, technologies and human actors (i.e. embodied bodies are material entities that process information). Economic sociology has contributed much to the SSF in the assessment of performativity of actors and social groups in the financial markets. MacKenzie and other prominent scholars in this field, such as Knorr Cetina and Preda, have demonstrated how finance operates on and embodies an assemblage of financial activities, discourses and knowledge mediated through social interactions. Social interactions involve the engagement of both human and also non-human actants as seen in how traders interact with computer screens in the process of financial trading. Economic sociology also analyzes how scientific, economic and quantitative discourses that constitute the „objectivity‟ of finance duly affect and influence finance operations and financial market movements (see Knorr Cetina & Bruegger 2002a; 2002b, Preda 2002; 2005) Major conceptual contributions can be seen in the “performativity of economics” that aims to identify the effects of the performances of economic theories, concepts, procedures, etc. (MacKenzie 19 2006a; 2006b; 2007). Geographers have taken on a similar research trajectory but focused on explicating the spatialities and networks that underlie financial practices and conduits, production and management of discourses and knowledge flows (Clark et al. 2004; 2005, Hall 2006; 2007, Hall & Appleyard 2009). In all, through ethnographic research methods, the SSF seeks to understand how finance is embedded in social networks, culture, technology, scientific knowledge and institutional contexts. (v) Financialization The burgeoning research on financialization seeks to uncover the integration of firms and everyday life in finance. The notion of financialization emanates from political economy and radical Marxian analyses of capitalism from the late 1960s to the 1980s. Financialization was deemed as a permanent structural necessity of the crisis-prone capitalist economy dominated by monopolistic corporations in the global financial network with the U.S. as its epicenter and viewed as a necessary form of surplus absorption in a capitalist system (see Baran & Sweezy 1968, Magdoff & Sweezy 1987). In human geography, Harvey (2003) has highlighted how financialization has since 1973, led advanced capitalist countries into debt traps through the dispossession of assets via credit and stock manipulations. Moving beyond statist perspectives on financialization, recent studies have turned attention towards corporate management and governance of firms. Firms are becoming attuned towards generating wealth through managing financial 20 investments rather than improving on production operations and product development and innovation. Hence, firms are mediating business strategies in view of their financial investments and position in the global financial markets. Financial value becomes a vital institutional and design criterion for firms that are increasingly integrated into the financial markets. As such, firms become exposed and influenced by investment decisions of shareholders, both institutional and individual investors, on their corporate strategies and management (see Froud et al. 2000; 2006, Clark et al. 2002, Engelen 2003, Duménil & Lévy 2004). In the rise of pension fund capitalism, US and UK pension funds are known to possess sophisticated international financial portfolios and are integral to the development of capital markets. With its investment capacity, pension funds have significant influence over corporate decisions of firms, lodging firms deeper into global finance and further impelled by financial performances and shareholder‟s dispositions (see Clark 1998, Clark & Hebb 2004; 2005, Clark & Knox-Hayes 2007, Clark et al. 2009). Research on the financialization of firms is increasingly contextualized in empirical studies of specific firms such as law firms, aerospace, Boeing, and firms in Munich‟s film and television cluster (Faulconbridge & Muzio 2009, Mullerleille 2009, Zademach 2009). These studies illustrate how financialization has affected firms‟ spatial organization as seen in their physical (re)location and the socio-cultural dynamics within a firm‟s operations. Furthermore, research on financialization has studied the extent to which finance has affected housing markets, household and individual financial 21 behavior and regulatory institutions across various geographies (Aalbers 2008, Langley 2008, Stockhammer 2008). In all, research on the geographies of finance emphasizes how finance remains constituted in different spaces and places despite the global flows of finance capital and virtualization of financial transactions. Rather than analyzing solely on the basis of financial operations and transactions, research on financialization has established that finance is constituted by both financial and non-financial actors and institutions. Hence, it is critical to analyze how financial markets and operations are embedded within wider real economic and social relations and to understand how and why actors and entities become enmeshed within the networks of finance (see Engelen & Faulconbridge 2009, Lee et al. 2009). As financialization becomes “inseparable from the economy, society, households and ordinary individuals” (Erturk et al. 2007; 2008, Foster 2007), there are significant avenues for research on finance in order to further comprehend its socio-spatial dynamics and impacts on the economy and society. 2.3 Geographical research on commodities: A critical exposition The social study of commodities has been duly addressed in the Marxian social relations of production approach, specifying how production, in the transformation of nature to commodities, is not possible outside of social and political structures of the economy (Smith 1984). Nature is understood as incorporated into the capitalist system of exchange and circulation by becoming 22 commodities ascribed with market-mediated monetary values and sold through the markets (Thrift 2000, Watt 2005, Bakker 2005). Commodities can be understood as outputs of two processes: production and commodification. Geographical research on the process of production of commodities is denoted mainly by agro-food commodities that are fundamentally derived or extracted from nature. This body of research is aimed at “reconnecting” the lives of producers and consumers and unpacking their entangled spatial organization and power relations within industries such as the agro-food, garment manufacturing and even tourism (see Hassler 2004, Coe & Hess 2005, Judd 2006, Thomsen 2007, Tokatli 2007). The process of commodification pertains to how entities that are deemed as public goods or not typically understood as goods and services become packaged into commodities and are sold through market mechanisms. This is addressed in the context of neoliberalization where commodification is adopted to facilitate resource and environment management. Other than the process of commodification, nature as per environments and weather is also increasingly financialized. In fact, financialization is founded on how agro-food commodities such as coffee and wheat are traded via paper contracts in the financial markets. It is this intersection of finance and commodity production, where commodities become finanicalized and traded in the financial markets, which I seek to explore in this thesis. Geographical research on the commodity production seeks to unpack the socio-spatial interactions, power relations and politics within the process of 23 producing and also consuming commodities. The global commodity chain (GCC) or the filière are the key approaches in assessing the structural changes and the „vertical‟ organization of factors of production. GCC approach, proffered by Gereffi (1994a, 1994b) [with preceding analysis on labour and production by Hopkins and Wallerstein 1986], conceptualizes the input-output structure of value adding economic activities, governance and social negotiations within production. Although this approach was initially used to expound the production process of garment and shoes, it has been also widely applied to the agro-food industry (see Watts & Goodman 1998, Dolan & Humphrey 2000, Fold 2002; 2004, Hudson 2002, Penny 2005). The GCC is subsequently rebranded as the global value chain (GVC) to extend analysis to a wider variety of products (see Gereffi et al 2005). The filiére approach, stemming from the French Regulationist School, is concerned with the regulative institutions, policies and cooperatives involved in agriculture production such as wine and dairy products. The filiére approach addresses local or national scale dynamics, while GCC/GVC accounts for more cross-border production operations (Raikes et al. 2000). However, both GCC/GVC and the filiére have been noted to embody “unidirectional” causal mechanism that treat politics, institutions and structures as sole influences on commodity production (Leslie & Reimer 2001, Reimer & Hughes 2004). Geographers, such as Crang, Bell and Valentine, have criticized how both approaches lack regards for the influence of culture, gender, prevalent discourses and consumption in their „vertical institutional and structural analyses of production. Subsequent analytical 24 approaches such as systems-of-provision and commodity circuits and displacement, therefore, emerged to reinstate the significance of „horizontal‟ factors such as consumers, market trend and culture in production. The systems-of-provision (SOP) approach considers „horizontal‟ factors such as consumption and material culture as integral within the vertical/global connections of production (Fine & Leopold 1993). SOP acknowledges that production is „variously organized‟ and hence, aims to provide a comprehensive examination of the spatial and temporal contextuality of production-consumption processes. SOP seeks to reinforce how “consumption structures production as much as the other way around” (Slater 2002:158). Contemporary research on organic agriculture is an example of production systems that is influenced by consumptive taste and also private regulatory standards on organic food production. Although SOP has addressed consumption-side influences on production, it remains to be delving on the structure and organization rather than the socio-spatial dynamics embedded in both consumption and production (Guthman 1998; 2002, Lockie & Kitto 2000, Mansvelt 2005). To this, Glennie & Thrift (1993) has proposed that the distinction and reduction of production and consumption dynamics into either „horizontal‟ or „vertical‟ approaches can be duly resolved by the concepts of circuits and networks. With regards to the “cultural turn” in geography, commodity circuits and displacement unveil the socio-cultural connections of producers and consumers that are masked by food and culinary cultures. Hence, although the food on our 25 table or sold in the supermarkets embody “obscence geographies” of labour and exploitation, they are displaced and duly removed from the geographical knowledges of food within the commodity circuit (see Harvey 1990, Cook & Crang 1996, Pred 1996;1998). What consumers see are sanitized, packaged products that are sold in the everyday environments such as the supermarkets. As these studies are geared towards understanding symbolic discursive practices and meanings attached to commodities, they have been criticized as “over-shooting” the cultural turn and that the “endless circuits of commodity culture” has little implications on politics of production and consumption per se (see Leslie & Reimer 1999, Hughes 2000, Jackson 2002). The influence of “culture” in geographical studies on commodity studies has led to the advent of networks. A network provides a „morphology‟ of complex interrelationships and the interconnected flows between actors and sites within the production and consumption of commodities. The notion of network is reflected in “new associationalism” that illuminates the new entrepreneurial synergies, skills and knowledges that underlie the organization and operation of the agro-food industry. It is not only about inter- and intra- firm relations but also the alliances and cooperatives amongst actors as well (Marsden et al. 2002, Clark 2005). The notion of a network is also reflected in the actor network theory (ANT) that seeks to unpack the relations between heterogeneous human and non-human actants. Here, the network approach can be deemed as a constructive and holistic platform with the capacity to account for the interrelations and politics of not only human actors but also non-human actors (materiality) within the production and consumption of 26 agro-food commodities (see Arce & Marsden 1993, Whatmore & Thorne 1998, Goodman & DuPuis 2002, Raynolds 2002; 2004). Although networks have been criticized as fundamentally descriptive rather than explaining the politics, organization and dynamics of commodity production and consumption (Fine 2004; 2005), the network approach remains a comprehensive analytical construct to uncover the interactions and linkages between them. Besides analyzing the process of production and consumption of commodities, geographical studies have also examined how commodities can be derived from the process of commodification. Such analyses are found in the studies of neoliberal management of resources and environment that seek to elucidate the scalar politics involved in “packaging” resources, such as water, into commodities sold in the markets (see Bakker 2001; 2002, Heynen & Robbins 2005, McCarthy 2006, Castree 2008a; 2008b). Furthermore, resources and the environment are also financialized. Financial practices are adopted in environmental management such as wetland mitigation banking and investments in environmental waste (Robertson 2004; 2006, Schoenberger 2003). The material properties of the atmosphere and weather have become financialized into respective derivatives and are traded in the global financial marketplace (Thornes & Randall 2007, Pryke 2007, Pollard et al. 2008). The management of carbon emissions has also adopted the financial trading system as well (Knox-Hayes 2009). Besides the environment, natural resources and agricultural products are also widely traded in the financial markets. However, the relations between finance and production of commodities have only been lightly addressed. 27 The earliest geographical research that has acknowledged the significance of finance in commodity production was perhaps FitzSimmons‟ (1986) study of the industrialization of agriculture production. She highlighted how finance capital is required in funding capital investments such as machinery and development of technologies to improve efficiency of agriculture production. On a similar note, Henderson (1998), in his study of agriculture in the late 19th to early 20th century California, USA, portends that capitalism does not only exploit nature directly through extraction of resources as capital is placed back into agriculture production in terms of credit loans for capital investments. In the agro-food sector, finance is more than just credit loans and funding. The world trade in coffee is overwhelmingly controlled by the New York and London futures markets, where the trading of oil derivatives as per futures contracts has had significant impacts on real influence on prices of coffee (Lyons 2005). Indeed, the price fluctuations endemic in this global marketplace has led to serious consequences for the economies of producer nations, such as countries whose economy rely heavily on coffee exports (Waridel 2002). Given the impacts of financial trading, the interrelations and spatialities between finance and commodity production requires further explication. Critiques of the reviewed literature in the following section draw out the underlying rationale of unpacking of the socio-spatial relations between finance and commodity production. 28 2.4 Uncovering the nexus of finance and commodity production: a sympathetic critique of the existing literature The socio-spatial dynamics within the operations of finance has at the centre of the research on geographies of finance. Recent studies on financialization have moved on to assess the extent to which finance has affected society and the economy. Pollard (2003; 2007), in unpacking the power relations and asymmetries of firm finance, asserted how finance is essential to economic coordination and does not exist alone or outside of production. This argument is also echoed in recent research on the financialization of firms where firms are increasingly influenced by and integrated into the financial world. To facilitate the understanding of the effects and impacts of financialization, financialization can be understood as a process in which entities such as firms become integrated into the financial markets. It is a process that involves a myriad of on-going and changing spatial organization of socio-economic relations; financialization is not “a stable object of inquiry” (Martin et al. 2008). A process-oriented understanding of financialization expounds the changing power relations and politics of how various actors and entities are becoming part of and drawn into financial networks. As such, other than providing credit and finance capital, finance involves the development, design and circulation of highly sophisticated financial contracts and products. Various entities, from firms to even the weather, are transformed into innovative asset classes and financial products that are traded in the financial markets (Leyshon & Thrift 2007). However, besides understanding the geographies involved in the design and structure 29 of financial products, further analytical deliberation is required to understand why these financial products are developed and utilized and how they are traded. This expanded approach is important because even though finance is a seemingly independent system, its provision of credit, risk management and trading services for production businesses operate within specific locations and are supported by complex negotiations embedded in social networks. Financialization as a process refers to the way in which profits are accrued primarily through financial channels rather than production activities (Arrighi 1994, Krippner 2005). In other words, it is a process in which profit accumulation and value creation are engendered through financial activities such as trading of derivatives. Although oil derivative trading is often understood as an aspatial circulatory flow subsumed within the finance system, a deeper analysis of this process reveals how these flows are mediated through distinct locales such as major financial exchange nodes and business locations with a high concentration of active oil firms and actors. Even though geographical research on commodities has recognized that finance is an integral part of commodity production, the extent of its significance, interrelation and socio-spatial dynamics between finance and commodity production requires further analysis. This thesis, thus, marks a rumination of the extent to which finance is significant in production, shedding light on how finance is in fact constituted and sustained through the provision of services to commodity production. Finance, like all capitalist entities, needs to sustain itself. This sustainability is dependent not only on the construction of new asset streams (Leyshon & Thrift 2007), but also developing 30 and providing services to actors who require them. As proclaimed Engelen (2008), future research on financialization should account for wider contextual variations. Moving beyond agro-food production, my thesis embarks on a study of oil. Oil is a commodity and a natural resource that is actively traded in the financial markets. Amongst the approaches in the study of production and consumption dynamics, the GCC/GVC approach is centred on uncovering the socio-spatial manifestation and governance of value-adding activities along the production process. However, this approach has been criticized for not taking into account the „horizontal linkages‟ of consumption and culture in production processes. In fact, circulatory services, such as finance, in production are also largely ignored. Finance is fundamental to the operation of every aspect of the economic system and it “…can no longer be considered to provide merely auxiliary linkages in GCCs” (Rabach & Kim 1994:124). For Rabach & Kim (1994), finance is an integral layer of a GCC that provides credit, produces financial products sold to investors and also derivatives that are traded in the financial markets. In comparison to GCC/GVC, a networked approach is deemed more comprehensive human and non-human in conceptualizing the complex interactions between actors in the production and consumption of commodities. An example of a network-based approach is that of the global production network (GPN). This approach that seeks to analyze the scalar organization, lattices of relations and socio-political embeddedness of firms in the production of industrial goods and services (see Henderson et al. 2002, 31 Dicken & Thrift 1992, Ettlinger 2001; 2003). However, GPN remains largely concerned with the linear or vertical dimensions of production (Henderson et al., 2002; Smith et al., 2002). Furthermore, the GPN approach remains intently focused on firm dynamics rather than on exploring the socio-spatial relations of other equally vital non-firm actors and institutions inherent in most production dynamics. To this, Hudson (2008) posited that a conjunction of both GPN and the cultural political economy approach would engender a deeper understanding of the complex flows and circuits of knowledge, commodities, money and value that are rooted in multiple scales, networks and spaces in the global economy. The analytical purchase of the GPN approach can thus be extended and further optimized to provide a more comprehensive understanding of the inherent processes, such as finance, within production. To this, I propose a study of oil trading, in uncovering the relationship and inherent geographies of both finance and commodity production. This complementary conceptualization will be elaborated in the following section. 2.5 Conceptualizing oil trading: Expounding the significance of finance in global production networks Contemporary economic geographical research on production of industrial and agro-food commodities has recognized the „horizontal‟ linkages such as consumption and culture in production. However, circulatory services in production, as per finance, remain relatively unaddressed. Finance requires critical attention because it provides the all essential credit support for production and also leverages on capital loans and selling of equity stocks to supplement 32 investments (Milberg 2008). Furthermore, with regards to the oil industry, production operations are dependent on oil derivative trading in managing and hedging against price risk incurred by cargoes and refined products exposed to market flucturations. However, as much as production „depends‟ on finance, finance is sustained by the need for credit and risk management of production businesses. I seek to ascertain the interdependence of finance and commodity production by unpacking the inherent geographies within process of oil trading. Research on the oil industry in economic geography, specifically the upstream extractive sector, has been explicitly studied by Bridge (2008a). Based on a GPN framework, Bridge effectively illustrates the broad linkages between the actors and spaces embodied within the GPN of oil. My conceptual framework, adapted from Bridge‟s (2008a) GPN of oil, identifies the co-constitution of the spatiality and flows of oil derivatives and material oil. 2.5.1 Unpacking the dynamic processes of the oil GPN – from production to trade With reference to Fig. 2.1, the production process of the oil industry begins with upstream exploration and extraction of crude oil. In economic geography, Bridge & Wood (2005) have stressed how “territorialization” of knowledge delineates upstream operations of oil exploration and production. This area of work has been furthered by Bridge (2008a) who clarified how the location of upstream oil firms is influenced by the politics of oil fields accessibility and reserves, materiality of oil, presence of technological barriers and ecological regulations. As the extraction and production of crude oil occurs in specific 33 locales, the state plays an unusually strong role in regulating rights and access to these oil fields. Hence, the territoriality of oil and the resource imperative limits the flexibility of spatial locations of upstream extractive firms. This spatial rigidity explains why key exploration and oil production firms are mainly national oil companies (NOCs) such as state-owned Abu Dhabi National Oil Company and Emirates National Oil Company (see Marcel & Mitchell 2006, Babusiaux 2007). Other than nation-states, the Organization of the Petroleum Exporting Companies (OPEC) is a prominent intergovernmental institution that has power, through its coordinated decisions of member countries (i.e. all key states of crude oil production except the U.S., Canada, China and Russia in Fig. 2.1), to influence the global volume of crude oil production. Private corporate establishments such as international oil companies (IOCs) or oil majors are also involved in upstream operations with their technological expertise. In fact, collaborations between IOCs, states and their corresponding NOCs are common. The extraction and production of crude oil operations also require support from upstream oil field service firms that provide technological, GIS information and consultancy. In its material form, the extracted crude oil is processed and refined before consumption is possible. As projected in Fig. 2.1, the world‟s largest refineries are found in countries that produce crude oil and also those that do not. Major IOCs do have extensive global business investments and operations in downstream processes located in the latter countries namely Singapore, 34 South Korea, Taiwan, India and the Netherlands. The building of refineries is extremely costly (to the tune of billions of U.S. dollars) and the location of refineries is largely determined by the proximity to source, demand markets, land rights and state control. For example, export-oriented refineries such as those located in Singapore are driven by proximity to demand markets in mainly Southeast Asia and at times, North Asia. This facilitates efficient dispatch of refined products and enhances the refinery‟s production response to market demands. There are also other private refining and manufacturing firms such as those in the US that refine oil mainly for local domestic consumption (see Yergin 1991, Horsnell 1997). Refined oil products can be either consumed directly such as petroleum or gasoline or feedstock such as chemicals for petrochemical industries. As shown in Fig. 2.1, the largest consumers of oil products are developed nations such as the U.S. and Japan and populous developing nations of China and India. Demand for oil is driven not only by populous nations alone; consumptive production of industrial chemicals and plastics in Japan and Singapore requires large amounts of oil-derived feedstock such as naphtha and other oil intermediates (see Doshi 1989, Chapman 1992, Pillai 2006). 35 36 The three main processes in oil production, from exploration to production of crude oil, refining and supply and to consumption of oil products, are marked by shipments of oil from source to refineries and then to consumer markets. Underlying these material movements is the process of oil trading. With reference to Fig. 2.1, oil trading marks the central circulatory process that underpins the movement of both material and oil derivatives in the GPN of oil. The process of oil trading is marked by the transactions of sale and purchase of crude oil and refined oil products in their material form and also oil derivative trading in the financial energy markets (Fusaro 1998, Fusaro & James 2005, Global Association of Risk Professionals 2008). The trading of material oil involves the buying and selling off the spot markets (located mainly in Houston, London and Singapore), where buyers readily transact through a price and take physical delivery of the oil acquired within the current month (Clubely 1998). Key actors who trade material oil are mainly refiners that require crude oil for production. Energy/ oil supply and trading firms and investment banks that have logistical support such as shipping terminals and storage facilities are also active participants material oil trading. As identified in Fig 2.1, the trading of material oil occurs through a Platts eWindow, an IT platform for online transactions. These transactions then are channeled through a price assessment process in determining and publishing the benchmark prices of crude oil and refined oil products. The trading of material oil is also conducted via over-the-counter (OTC) transactions where an oil contract is negotiated and settled bilaterally and 37 privately between two parties (see Appendix I). The trading of oil derivatives is thus negotiated through OTC transactions as well as indicated in Fig. 2.1. OTC transactions can also be settled through clearing services provided by commodity exchanges such as Chicago Mercantile Exchange CME Clearport or IntercontinentalExchange‟s ICE Clear and also Singapore Exchange‟s AsiaClear (see Appendix II). Besides providing clearing facilities for OTC transactions, commodity exchanges themselves are also central bodies in electronic trading of oil futures and other oil derivatives such as options. My analysis of oil trading thus accounts for both OTC transactions and trading via organized exchanges. The trading of oil derivatives serves as a means to manage price risk exposures for producers and suppliers of oil products (D‟Ecclesia 2008). It also potentially involves profit capture through exploiting price differentials by actors who participate in the process. As much as the GPN of oil is understood as dependent on the finance for credit loans and also the process of oil derivative trading for risk management and profit making, finance is in turn sustained by these processes as well. These process of oil trading as a whole is underlined by socio-spatial and knowledge networks that enable both the flows of material oil and also oil derivatives as illustrated in Fig 2.1. To this, my empirical analysis seeks to instate the interdependence between oil derivative trading and the trading and production of material oil via the process of benchmark pricing of oil, the prevalence of organized exchanges of Chicago Mercantile Exchange (CME) and IntercontinentalExchange (ICE), and the process of over-the-counter (OTC) trading. 38 2.5.2 Interdependence in the GPN of oil Oil derivative trading and the trading and production of material oil are vital circulatory processes in the GPN of oil. These processes, though represented by separate flows in Fig. 2.1, do affect and adjust to each other. I propose that such mutual effects and adjustments are grounded within distinct socio-spatial negotiations and knowledge networks. Hence, interdependence, in the GPN of oil, pertains to how different actors, within the processes of oil trading rely on each other‟s knowledge and information in decision making and trading strategies. More importantly, these processes are grounded within specific locales that embody vibrant trading of both material oil and oil derivatives. The notion of interdependence has been addressed by Lazzarini et al (2001), who through concept of a netchain, identified the various forms of interdependence that reflects different degrees of connectedness and ties between firms and actors in an industry or an organization. The concept of netchain reveals the inter-organization networks of „horizontal‟ ties between firms within a particular industry that are sequentially arranged based on vertical ties between firms in different layers from a supply chain perspective (see Fig 2.2). Hence, the netchain accounts for the social interactions not only between groups of actors but also that within each distinct group. 39 Fig. 2.2 Example of a generic netchain (Lazzarini et al. 2001 pp. 8) With regards to the netchain, the complexity and coordination of actors is conceived through three broad forms of interdependencies: pooled, sequential and reciprocal. These interdependencies, adopted from Thompson‟s (1967) seminal analysis of organization within firms, reflect an integrative element because it considers different forms of collaborations and interactions between actors and organizations. Pooled interdependence is achieved through standardized rules and transactions in mediating and linking independent actors. This can be seen in Internet based B2B businesses where anonymous actors interact through technological or structured organizational interfaces. Sequential interdependence pertains to direct relationships between actors ordered in a serial fashion so as to optimize operations especially in logistics and inventory management. Both these interdependencies embody weak social relations where actors are connected via structured and organized procedures. Reciprocal interdependence refers to how actions or skills of one influence the behaviour of others in a non-sequential or non-fixed manner, mainly observed through feedbacks or consultative reviews. Thompson (1967) emphasized that the actions of each position must adjust to the actions of one of more others. Relations between actors are thus marked by tightly coupled strong social ties 40 where the knowledge of one strongly depends on the knowledge of the other, often leading to the formation of strategic alliances and networks. It is this notion of interdependence of mutual effect and adjustment, to which I seek to explicate, that underlies and draws together the processes of oil derivative trading and the trading and production of material oil. Coe et al. (2008) has purported how the GPN can address effectively similar „horizontal‟ and „vertical‟ negotiations (as would a netchain) due to its explicitly networked approach that is capable of exploring the dynamics of different agencies, actors and processes. The netchain has incorporated the interactions within a group of similar actors (i.e. horizontal negotiations that affect chain dynamics) in its analytical framework. However, Coe et al (2008) has postulated that such „horizontal‟ negotiations can be extended to incorporate other significant actors and processes beyond the vertical chain that affect supply and production dynamics as well. For example in the oil industry, reporting agencies, financial institutions and investors are active participants in the process of trading of oil derivatives and even trading of material oil alongside key actors such as IOCs and energy/oil supply and trading firms. The GPN approach, with its relational and network ontology, is well-fitted to address the various configurations of socio-spatial negotiations, including that of interdependence that underlies the concept of the netchain. 41 2.5.3 Grounding interdependence: Power, embeddedness and value creation in oil trading To elucidate the significance of finance in the GPN of oil, the interdependence between the processes of oil derivative trading and the trading and production of material oil needs to be fully conceptualized. The assessment of the processes and knowledge flows of material oil trading draws out the importance of understanding benchmark pricing in the oil industry. As seen in Fig. 2.1, Platts is a reporting agency that assesses and publishes benchmark prices of oil and oil products for Asia via Singapore. This process relies on the actors in the oil industry to offer price bids and trade material oil via the Platts e-Window platform. Platts proceeds to publish the resultant benchmark prices derived from the assessment of the transactions and corresponding prices of a trading session. The published benchmark prices are widely utilized by actors in the oil industry to determine the value of their oil products for sale in the market. Hence, Platts plays an important role in knowledge output that “…becomes a benchmark around which market players subsequently organize their affairs” (Sinclair 2005:15). Given the extensive dependence of actors in the oil industry on Platts for benchmark pricing, Platts becomes a vital institution that has the power to „govern‟ trade transactions and influence oil prices in the oil industry. However, Platts has to negotiate its „power‟ by maintaining and establishing itself as an embedded knowledge network (EKN) through social interactions and relations with other actors in the oil industry. According to Sinclair (2005), an EKN is an analytical and judgemental system recognized and sustained by a community who depends on its knowledge outputs in day-to-day operations. This is 42 reflective similarly of the prominence of organized exchanges, specifically CME and ICE, in the global oil industry and the relative lack of success in establishing one in Asia (see more in Chapter 5.3.1). The trading of oil derivatives provides the GPN of oil an avenue to manage price risk exposure. Indeed, risk is a fundamental driver for derivative trading (Tickell 2000). Derivatives are financialized oil instruments developed to counteract price risks to which cargoes in transit or refined oil products sold at a future date is exposed to. The volatility of oil prices requires rapid and informed responses in the management of price risk exposures. Only actors embedded in efficient and established information and knowledge networks are able to survive and operate their businesses effectively (Green 2000). Hence, other than IOCs, investment banks such as Goldman Sachs and Morgan Stanley with existing compatibility of financial trading technical system know-how (Knox-Hayes 2009) and broad client network base are also able to participate in the process of trading oil via their in-house energy trading teams. Energy/oil supply and trading firms, such as Vitol, SK Energy and Mercuria, are active participants in oil trading as well. Although both investment banks and energy/oil supply and trading firms do not produce refined oil products as per IOCs, they remain key actors in oil trading by providing liquidity that greases the giant wheel of the financial oil market. More importantly, together with the IOCs, investment banks and energy supply and trading firms are part of and embedded within distinct socio-spatial negotiations of oil trading. These socio-spatial negotiations are central to the information and knowledge networks delineated by both tacit and non-tacit knowledge. 43 Coined by Michael Polanyi (1967), tacit knowledge is about discovering and “knowing more” through personal associations and commitments. Through tacit knowledge, one is able to gather and formulate new ideas and strategies. Although Platts and organized exchanges provide substantial information on oil prices through real-time updates and market reports and provide trading platforms in which traders can buy and sell oil, I purport that oil trading is negotiated through a high degree of interpersonal networks, trust and interactions. I seek to disclose the social relations amongst actors; the importance of building up trust and relationships to ensure smooth business transactions and improving competitive-edge via first-hand knowledge on market movements. Hence, knowledge and information networks in the GPN of oil are not dominated by embedded knowledge networks such as Platts. Deep social relations and trust amongst actors perpetuate information and knowledge that are vital in formulating successful oil trading strategies and decision-making. Hence, both the flows of oil derivatives and material oil as indicated in Fig. 2.1 are mediated by information and knowledge networks underlain by various actors and degrees of social interactions. As noted by Berndt & Boeckler (2009), this reinforces how economic action and activities are not only about interactions between firms and institutions but also about their embeddedness in interpersonal networks and culture of an industry and market. With reference to network embeddedness that pertains to the connections between actors within a network across different spatialities (Hess 2004) and spatial and relational proximity that highlights the importance of 44 mediating distances and being „there‟ (see Gertler 1995, Oinas 2000, Morgan 2004), I stress how oil derivative trading remains geographically bounded in prevalent virtual nodes of organized exchange of CME and ICE and physical locations such as Singapore. As an active oil trading hub and oil price determination centre in the region with an active over-the-counter (OTC) oil market (Hong 2007) and robust financial infrastructure, Singapore marks a suitable location for analysis. The dynamics of oil trading will be evaluated through media reports and original fieldwork findings from interviews conducted with traders and other related personnel in the oil industry based in Singapore. Although the trading of oil derivatives is an integral part of the GPN of oil in providing risk management, it also engenders profits for actors within and also beyond the oil industry. This deliberation on value creation is triggered by the 2008 price spike in oil where debates were centred on whether real demand-supply, as reflected in trading and production of material oil, or speculative trading via oil derivative trading has caused oil prices to surge to beyond the US$100 mark. Value creation has been widely discussed in management and business studies5. In this thesis, value creation reflects Marxian concepts of surplus value and more orthodox ones associated with economic rent produced by labour in excess of the amount needed to maintain it (see Marx 1991, Henderson et al. 2002, Rutherford 2002). In GPN studies, value creation stems from central manufacturing and production of material goods and services. However, I posit that value 5 Value creation, in business and management studies, is understood as value that is created, value-adds to bring a set of products to market so as to meet or exceed the needs of customers (Sturgeon 2001, Porter 2008). 45 creation as per speculative activities, though occurring as a distinct and seemingly „detached‟ process, remains an integral part of the sociospatial negotiations of oil trading and production. An oil derivative is a financial instrument used fundamentally for pricing risk management in the oil industry. However, it has also been utilized to generate profits by speculative activities (i.e. commodity funds) that lie „outside of the industry. With reference to MacKenzie‟s (2006a; 2006b) view on the performativity of economics, oil derivatives and the procedure of oil derivative trading can be understood as having empirical validity and effects as would economic theories and models. Although oil derivatives are not concrete entities as they are a representation of the value of material oil, they are real in their effects on oil prices and also the ability to create value. While the effects of the “performances” throughout oil derivative trading have caused oil prices to fluctuate or skyrocket as seen in the 2008 price spike, the intentions of actors, whether they are really trading oil derivatives for risk management purposes or speculating for monetary returns, remain unclear. Thus, the performativity of oil derivatives pertains that oil derivative trading should be understood as a procedure negotiated through different intentions that yield outcomes which affect the process per se and in turn, oil trading and production as a whole. This is especially so as oil prices remain essentially influenced by the mutual adjustments and effects of both oil derivative trading and the trading and production of material oil. Hence, I argue that speculative activities aimed value creation and their geographies, though 46 distinct from those of price risk management, should be understood as part of the socio-spatial dynamics of oil trading. 2.6 Concluding comments This chapter has outlined the major geographical contributions and research trajectories in the study of finance and commodities respectively. I proffer how a geographical analysis of oil trading sheds light on the inherent linkages between finance and commodity production. In today‟s increasingly interconnected global economy, the interdependence between different economic activities and the economic contribution of services to accumulation in territories and production systems have been underestimated and misrepresented (Walker 1985). Adopting the GPN approach as a hybrid metaphor of chains and circuits that involves both linear and non-linear linkages and flows (Neilson & Pritchard 2009), I aim to draw out the inherent spatialities and negotiations of finance within the GPN of oil by addressing the spatial co-constitution of oil derivative trading and the trading and production of material oil and how these processes are interdependent. My study of oil trading is supported by personal experiences and negotiations of the „field‟ and secondary sources. A discussion and reflection on fieldwork in the following chapter is not merely an academic requirement, but pertinent in foregrounding the intricate networks, relations and politics that underlie the process of oil trading. 47 CHAPTER THREE: RESEARCH METHODOLOGIES 3.1 Introduction Qualitative methods are increasingly utilized in economic geography research, especially in understanding the spatial negotiations of economic actors from migrant workers to corporate elite personnel. In adopting these qualitative methodologies, economic geographers have reflected feminist research consciousness of positionality, situated knowledge within the „play‟ and performances in their research processes (Barnes et al 2007, Kelly & Olds 2007, Nagar & Geiger 2007, Pratt & Johnston 2007). Awareness and reflexivity of research processes and performances, often undermined through written texts (such as this thesis), are essential because even in the supposed „neutrality‟ and „objectivity‟ of research (i.e. quantitative economic geographical research) are in fact imbued with personal psychologies and agendas that affect the process and more importantly, the outcome of a research (Haraway 1991, Rose 1993, Pratt 2000). Stemming from a feminist perspective on a critically and politically responsible research, my methodological approach aims to be constantly reflexive, recognizing that positionalities do shape research encounters, and that knowledge is fundamentally situated and partial, produced by positioned actors in various relations within research (Jackson 1993, England 1994, Rose 1997, Hanson 1997, Valentine 2002, Ian et al. 2005). This chapter provides an assessment of my field experience and methods utilized in my study of oil trading and production (ie. fieldwork conducted from February to October 2009). I reveal how my engagement with the „field, through connections, 48 trust and layers of relational power, reflects the socio-spatial negotiations of oil trading. 3.2 Negotiating the ‘field’: Networked connections, trust and power Research is conventionally understood as a process of collecting information by going into the „field‟. However, as purported by Latour (1999), the „field‟ does not pre-exist but is actively constituted through the research process. Table 3.1 is an excerpt from my field notes and corresponding interview dialogue with an oil trader. Table 3.1 Field notes and reflections Transcribed qualitative interview excerpt Field notes Date: 25th February 2009 -Existing „field‟ of more than 100, Location: A restaurant in central business district remember to call up the companies and of Singapore email them.  7th March 2009: No response from Li Na (LN): Is it possible to know how many oil companies and all declined interview. traders located here? Start interviewing other personnel in the „field‟ who are closely related or support Oil Trader A (OTA): Anything from 150 to 200. I know quite number of them and we often have trading activities. drinks at the end of the day…You‟ve mentioned to interview 50 traders? If you can get 5, count -I thought traders would be more willing yourself lucky. We‟re really busy. I can tell you to spare me sometime given that my we‟re not interested... Economic crisis, oil price paper is not assessing the business slump, lost money, not in a good mood…Traders models or performances of their don‟t like to talk lest getting quoted. Information is company. OTA seems to be rather sensitive and the community is small…the last „elusive‟. Economic crisis and oil price time a reporter called me up, quoted my company slump not to my advantage. and what I‟ve said…[annoyed tone] Got me into serious trouble… -Indeed by reflecting and exploring these LN: I am sorry to hear that… this is a purely moments, research assumptions become de-centred and certainties are questioned academic study… in knowledge production (Valentine 2002) OTA: Just keep it anonymous. Absolutely nothing on my name or where I work. 49 From the excerpt, the interviewee can be seen as actively constructing the the „field‟, emphasizing and pre-empting the difficulties in accessing the restricted nature of the deep social networks of the oil industry (Hall 2007). From the interview, I felt distanced yet situated in the „field‟ as I spoke to the oil trader; the „field‟ was not some distinct, objectified space, but understood from where I was situated (Nast 1994). Hence as noted by Massey (2003; 2005), the „field‟ should not be perceived as a natural space, but constituted through a multiplicity of coeval and also interrelated socio-spatial occurrences. This can be seen in how the globality of economic downturn and oil price slump, in causing worldwide job losses, has led to a less than favourable environment for academic enquiry in Singapore. However, as I spoke to more interviewees, gathered through the contacts of personal friends and former professional affiliates in the banking sector, the field began to undergo transformation (Latour 1999). I was able to engage with interviewees who served as „gatekeepers‟ in my research process. These „gatekeepers‟ given their reputation and seniority within a company or the oil industry, provided credibility in referrals and securing potential interviews with other professionals in the oil industry (Herod 1999). Hence, the „gatekeepers‟ served as critical points of networking and connections that opened up the „field‟. The importance of „gatekeepers‟ in negotiating the „field can be seen in how a senior executive from Platts acknowledged my „connections‟ with a few senior oil traders and a director of an organized exchange whom I had interviewed previously. The senior executive stressed how “…that‟s lesson number one for you in the oil industry… it‟s who you know and a lot of networking”. Other than an interview, I gained access to observe a „live‟ Platts oil trading session and even attended a Platts 50 methodology class that was essentially extended to corporate personnel in the oil industry. This revealed how it was possible to obtain “…useful date from them (i.e. elites) if you know others that they know and respect” (Ostrander 1993:12). As I interviewed more professionals in the oil industry, such as oil traders, risk analysts, finance executives, personnel from organized exchanges and oil brokers, I uncovered how these „corporate elites‟ wild varying degrees of power and control in the oil industry and are privileged in their knowledge (Parry 1998, Odendahl & Shaw 2002). Indeed, the „field‟, much to the likes of the oil industry, is a “field of power” (Katz 1994). Power, in the „field‟, should be understood in how it “…moves round a constellation of potential positions” (Ward & Jones 1999:304; emphasis in original) and is “a relational effect of social interaction” (Allen 2003:2). The constant movement of “potential positions” of (asymmetrical) power was explicitly experienced throughout my research where the „field‟ is constituted through a plurality of positionalities and relations (Crang 2002). This is reflected in an encounter with an oil trader who openly expressed his unwillingness to participate in my interview but had to do so because his boss appointed him to. I was a researcher subjected to his cooperation in the interview, but was also someone with connections to an upper management personnel. Hence, as much as it was against his will, the oil trader remained obligated to grant me an interview upon his superior‟s request. During the interview, the oil trader revealed that his company was undergoing major restructuring due to the economic and financial downturn. He was thus facing an impending 51 possibility of losing his job. It was necessary (and natural) for me to extend empathy and reinforce credibility and receptiveness towards his extremely sensitive and tense job situation (Rew et al.1993, Corbin & Morse 2009). However, by doing so, I was able to overcome the initial hostility and the interview was well engaged and proceeded smoothly. This encounter has revealed how rather than a structural and dichotomized perspective of power in treating research subjects as „elites‟ due to their social status or position in the corporate world (Cochrane 1998, Sabot 1999, Few 2001, Smith 2006), power is indeed constantly negotiated through different positionalities throughout the interview process. 3.3 Field techniques To expound the socio-spatial negotiations of oil trading and the oil GPN, my research has adopted qualitative approaches, such as interviews, that are conventionally used in collecting empirical data and information for GPN studies (Hess & Yeung 2006). The validity of data collected through quantitative methods has been questioned as opposed to that of quantitative methods (see Mattingly & Falconer Al-Hindi 1995). However, this can be supported by establishing „rigour‟ in the process of qualitative research. Baxter & Eyles (1997:506) have proffered that self-reflection “allows qualitative research to demonstrate the relevance of the single case (credibility) and move beyond it (transferability) with a degree of to certainty (dependability and confirmability). In the following sections, I seek to reflect on and validate the methods utilized in my research, highlighting how methods 52 are not a set of fixed procedures for reporting a given reality, but in fact an assemblage of performances and reflexivity (Law 2004). 3.3.1 Semi-structured interviews The method of semi-structure interviews was adopted in my study on oil trading and the oil GPN as it provided the structure-balanced flexibility in eliciting critical information, exploring related issues and enabling fluidity throughout the verbal interchange (Valentine 1997, Hughes 1999, Longhurst 2003). Interview is one of the most commonly used research tools in social science research (King 2004). However, respondent reluctance, to which I had to overcome in the trying economic climate, is also a common fact as well (Creswell 1998). Ensuring anonymity and destruction of recording and information upon completion of research was vital in securing interviews and also for interviewees to speak and engage „more freely‟ (Richard 1996, Welch et al. 2002, Gillham 2005). Almost all the interviewees (except for Mr. Troner) warned against any disclosure of their identity and company. Hence, my interviewees‟ profiles are denoted by age-range and years of work experience. As interview sites were within close proximity to the interviewees‟ offices, a brief description rather than an exact address of the interview sites is presented in Table 3.2. My primary option of face-toface interview was denied by many and therefore telephone interview and Internet MSN chat were adopted to support my study. The company locations of interviewees who participated via phone and online MSN interviews are noted in the table to provide a general overview of the location of oil firms in Singapore. From Table 3.2, interviewees were mainly working 53 in firms located in the South and CBD areas, within close proximity to ports, shipping terminals, other oil firms and also financial institutions. As documented in Table 3.2, 16 out of 25 interviews were conducted face to face, while the rest of the interviewees only agreed to be interviewed over the phone or online MSN chat. I was not able to interview oil traders employed in a financial institution. However, most of the interviewees were familiar with the operations of oil trading in financial institutions and a number of them had prior experiences working at an energy/oil desk for a financial institution. The face-to-face interview, delineated by corporeal presence and deep interview engagement, has been regards as “the optimal way to actively engage with research subjects and to maximize the efficacy and equality of the date collecting enterprise” (Seymour 2001:155). Table 3.2 Profile of semi-structured interview respondents Face-to-face interview Name Age Yrs of Sex Location of interview range experience (Yrs) Trader A >50 >20 M Restaurant in South/CBD area Trader B >50 >20 M Trader‟s home Trader C 30-40 >5 M Starbucks in South/CBD area Trader D 30-40 >5 M Restaurant in South/CBD area Trader E 40-50 >15 M Office meeting room in South/CBD area Trader F >50 >25 M Dome café in South/CBD area Trader G >50 >20 M Spinelli café in South/CBD area Trader H >50 >25 M Trader‟s home Exchange Director 30-40 >20 F Coffee place in South/CBD area Exchange CEO 40-50 >5 M Office meeting room in South/CBD area Broker A 30-40 >10 M Dome cafe in South/CBD area Broker B 30-40 >10 M Starbucks in South/CBD area Hotel lobby café in South/CBD Risk Analyst A 20-30 >2 M area 54 30-40 30-40 >10 >10 M M Spinelli cafe in South/CBD area Starbucks in South/CBD area 30-40 >10 M Starbucks in South/CBD area Age range (Yrs) Yrs of experience Sex Location of respondent’s Company 30-40 >10 M South/CBD area >50 40-50 >10 >10 F M Al Troner >50 Online interview (MSN) Name Age range (Yrs) Trader I 20-30 Trader J 20-30 Trader K 20-30 Trader L 20-30 Risk Analyst D 20-30 >25 M West area West area Houston, Texas (USA) President of Asia Pacific Energy Consulting Yrs of experience Sex Location of respondent’s Company >2 >3 >2 >3 >2 M F M M M South/CBD area South/CBD area West area South/CBD area South/CBD area Risk Analyst B Risk Analsyst C Platts senior Executive Phone interview Name Oil finance executive A Oil finance executive B Business Analyst However, optimity is not solely determined by the interaction between researcher and the researched. The interview process unfolds in dialectic relation with the „place‟ of the interview (Elwood & Martin 2000, Sin 2003). To maximize the duration of an interview and for the convenience of my interviewees, most of the face to face interviews were conducted at restaurants or coffee places near to their offices. Although the quieter restaurant settings were more conducive for conversations and audio recording of interviews, my interviewees were anxious on being overheard or seen by colleagues or business associates at the restaurants. Oil trader A, for example, was constantly on a „look out‟ while he answered my questions 55 during the interview. He and other interviewees alike did not want to be mistaken as talking to a „reporter‟ or discussing their trades with someone outside of the company. As such, interviewees in restaurants were less open to share their knowledge and views. Comparatively, interviewees shared their knowledge and opinions more freely in telephone interviews and internet MSN chats. While both interview approaches lacked corporeal visual cues, they effectively eliminated anxiety experienced by interviewees in a publicly-conducted face-to-face interview. Telephone interviews and computer mediated conversations are advantageous due to the convenience and cost efficiency for both the interviewee and interviewer. They also mediate sensitive and embarrassing topics where interviewees are more comfortable to speak behind a computer interface or by conversing through the telephone (Miller 1995, Shuy 2002, Mann & Stewart 2003, Markham 2004, Sturges & Hanrahan 2004, Pridemore et al. 2005, Stephens 2007). Furthermore, telephone or online interviews overcame geographical distances such as the interview conducted over a longdistance call from Mr. Troner who was located and worked in U.S. Interviewees were more comfortable with face-to-face interviews conducted in coffee places rather than in restaurants. The setting of a coffee place (i.e. the busy flows of and on-going conversations between customers) provided a casual „front‟ for the interviewees. Despite the noisy backdrop of a coffee place, the quality of audio recording was uncompromised with a good voice recorder. Dressed smartly and appropriately, I blended in amongst other corporate workers who were also engaged in information and knowledge exchange over coffee away from their offices. However, self presentation in 56 sustaining engagement in an interview required more than just appropriate corporate outfits and comportment (Cochrane 1998). Being a female researcher outside of the largely male-dominated oil industry also did not mean that confidential or difficult issues were discussed freely as I was “unthreatening” or “not official” (see McDowell 1992a, 1992b, 1998). My knowledge (or ignorance) of the oil industry mattered and was constantly verified by my interviewees. As noted by Schoenberger (1991), it is essential to be an informed interviewer. Interviewees were more comfortable and willing to communicate knowing that I understood major technical terminologies and general processes of the oil industry. For example, Trader F revealed that he agreed to the interview because my aide memoire, which he received through email, reflected a comprehensive understanding of the oil industry. Other than coffee places, interviews were also conducted in office meeting rooms and interviewees‟ homes. Away from public gaze, these interviews engendered deeper insights on oil trading as opinions and comments on the oil industry were generously expressed. However, I felt a need to be „extra careful and composed‟ as I was invited to the office and even more so, in to the private sphere of the interviewees‟ homes. I was readily queried on my research agenda and my relationship with the „gatekeepers‟ that directed me to them; I was not only a researcher but an embodiment of trust between the „gatekeepers‟ and interviewees. As such, gaining knowledge and information from interviews required careful establishment of trust and negotiation of power relations between interviewees, „gatekeepers‟ and myself. 57 3.3.2 Corporate events: Seminars and training session As stated earlier, I proceeded to observe a daily Platts trading session after an interview with the Platts senior executive. I was a covert observer accompanied by another executive, who provided detailed answers and explanations to my queries on the „live‟ trading session on the Platts eWindow. This provided critical contextual information to understand further the inner workings of the oil industry. My negotiation of the „field‟ involved overt participation (Walcott 1995) in two seminars and a corporate training session (see Table 3.3). I was also enrolled in a Platts Methodology Training Session attended by various oil industry professionals. This session enabled my networking and interaction amongst participants while learning about the process of daily benchmark pricing of oil. Table 3.3 Corporate events attended Date Event Industry Perspectives Series: Impact of Falling Oil Prices 6th April American Chamber of Commerce, Singapore (Energy 2009 Committee) 17th & 18th Platts Annual Crude & Refined Products Forums Aug 2009 9th Sep Platts Methodology Training Session 2009 I was able to attend the seminars and methodology session because my interviewees referred and registered me for these events. The seminars were mainly meant for networking amongst professionals in the oil industry and hence provided great opportunity for me to interact with them and to observe their networking practices. Despite of my being a research student amongst corporate actors at the seminars, I was active in taking initiatives to 58 interact with them over coffee. As Moser (2008) has noted, personality, alongside postitionality, is critical in affecting the negotiations of the „field‟. However, I managed only to sustain some discussion on oil trading and production dynamics with those introduced by former interviewees present at the seminars. These conversations contributed to my knowledge of the oil industry and supplemented the secondary textual data, such as brochures obtained and notes taken during the event presentations. Due to the brevity of my interactions at the events and the lack of strong social bonds (i.e. purely professional working relations) between former interviewees and their colleagues who were introduced to me, my attempts to secure more interviews were futile. As noted in Section 3.2, gaining access to the „field‟ depends not only on “who you know” but also the relations between the „gatekeepers‟ and their friends and colleagues. Follow-up calls and emails to these oil industry professionals after the events were met with either no reply or continuous postponing of interview dates and time slots. I was only able to interview a senior oil trader who has presented at one of the seminars. Hence, these events mainly provided an avenue for secondary data and information collection and also grounds to observe and negotiate the „field‟. 3.3.3 Discourse and textual analysis Knowledge and information are perpetuated through discourses and texts such as newspaper reports, official speeches, company analytical reports, charts and even maps. Although knowledge gained through interviews are perhaps the “closest” we can access the corporate world (Hughes 1999), the partiality of this knowledge can be supported through discourses and texts as 59 well. Websites of company and organized exchanges, news and industry reports were duly referred to in writing this thesis. These discourses were useful in developing my knowledge of the oil industry that was required to sustain conversations during interviews with corporate elites as denoted in Section 3.3.1. Furthermore, the discourses also provide a „basis of comparison‟ against my interview data. These include books on the global oil industry, brochures on Platts services to which I obtained from seminars, journals as per Oil and Gas Journal and the US‟s Department of Energy, Energy Information Administration EIA website. As I was not able to interview actors from the finance industry, promotional material and reports on energy and commodity investment funds aided in my analysis on the financialization of oil. However, discourses and texts should be treated carefully in view of the inherent politics within their „construction‟, as evident in the studies of power relations in corporate and political rhetoric (Hall 2001, Lees 2004, Mills 2004). 3.4 Concluding remarks This chapter has addressed the research strategies utilized in negotiating the „field‟, highlighting how networked connections, trust and power are integral in research process. My evaluation seeks to (re)instate how knowledge created through the assemblage of performances and reflexivity in ever-changing socio-economic-spatial dynamics pertains that knowledge is not “…objective, pure or innocent” but rather a “…relational form of knowledge” (Desmond 2004:268). In fact, knowledge continues to be (re)constructed through the writing of this thesis based on a selection of certain points from 60 circuits of information in producing a desired final narrative (De Certeau 1986, Crang 2003). As such, after methods, knowledge remains essentially partial and situated but never devoid of relationality, power and intent. Hence, this thesis, insofar as a negotiation of the „field‟, has enabled me to explore and uncover the strategic socio-spatial networks of knowledge and power within the process of oil trading and production as a whole. 61 CHAPTER FOUR: GEOGRAPHY AND NETWORKED NEGOTIATIONS: OIL PRODUCTION, TRADING AND BENCHMARK PRICES 4.1 Introduction As noted in Chapter 2, production and trading of oil embodies distinct geographies and socio-spatial negotiations. Oil production stretches across various geographical locations and is delineated by either production of crude oil or refined oil products. The upstream crude oil production is territorially bounded, determined largely by the location of the oil reserves and often within the jurisdiction of the state. On the other hand, the downstream production of refined products via refineries is mainly located close to demand markets. Hence, the production of refined oil products requires purchase and shipment of crude oil to the refineries. Price affects and is integral in the purchasing and selling of (i.e. trading) both crude and refined oil products. Since the 1980s, oil majors have been involved in the trading of oil to secure crude supply for their refinery productions (Clubley 1998). Benchmark prices serve as critical price references for oil trading around the world. Not only is oil production and trade negotiated within regions and regional nodes, the assessment of benchmark prices of crude and refined products are also grounded in similar spatialities, such as Singapore for Asia as well. As the first empirical analysis, this chapter provides an overview of the economic geographies and socio-spatial negotiations of oil trading and production. Furthermore, this chapter analyzes the role of Platts, a reporting agency, in the circulation of information and benchmark pricing of oil in the 62 Asian region. I seek to assess the knowledge and information networks and the social negotiations of Platts and other key actors who trade on the Platts eWindow. I proceed to draw out the co-constitution of oil derivative prices and oil prices determined through trading of material oil within the Platts benchmark price assessment. This foregrounds the analysis of the interdependence of finance as per oil derivative trading and the trading and production of material oil in the following chapter. 4.2 Geographies of oil production: From crude oil to refined oil products The geography of oil production is marked by two key processes. First, upstream exploration and extraction of crude oil and second, downstream refining of crude oil into refined oil products (Bridge 2008a). The production of crude oil is dependent on the availability of oil in proven crude oil reserves. As shown in Fig. 4.1, the Middle Eastern countries account for about 60% of the global holding of total available proven oil reserves. Specifically, national oil companies (NOCs) from the Middle East are major producers of crude oil, given their access to the country‟s property of oil reserves (see Table 4.1). However, private firms, such as international oil companies (IOCs), are able to secure oil reserves as part of their global supply through contractual agreements with NOCs (Maugeri 2006). These agreements include product sharing contracts, service contracts and buy-back deals that often involve technology transfer and even staff training (UNCTAD secretariat 2009). 63 Source: BP Statistical Review of World Energy June 2009 Fig. 4.1 World proven crude oil reserves (end of 2008) Table 4.1 Key Geographies of production and corresponding major oil firms Million Tonnes per Major oil firms/ oil corporations Country annum (* state owned) Saudi Arabia 515.3 Saudi Aramco* Russian Federation 488.5 Rosneft*, Lukoil, TNK-BP US 305.1 Exxon Mobil, Chevron, ConocoPhilips Iran 209.8 National Iranian Oil Company* China National Petroleum Corporation*, China 189.7 Sinopec*, Petrochina Company Ltd* Mexico 157.4 Petroleos Mexicanos* Canada 156.7 Petro-Canada, Compton Petroleum UAE United Arab Abu Dhabi National Oil Company*, Emirates 139.5 Emirates National Oil Company* Kuwait 137.3 Kuwait Petroleum Corporation* Venezuela 131.6 Petroleos de Venezuela* Iraq 119.3 Iraq National Oil Company* Norway 114.2 StatoilHydro Nigeria 105.3 Nigerian National Petroleum Company* Statistical Source: BP Statistical Review of World Energy June 2009 64 Table 4.2 World’s largest refineries and corresponding locations Source: Nakamura (2008) Oil & Gas Journal Eastern Hemisphere/ Asia Map Source: BP Statistical Review of World Energy June 2009 Fig. 4.2 Map of major trade movements of oil 65 The flow or trade of crude is determined by demand and supply. The movement of oil, specifically crude oil occurs because of domestic consumptive needs and that refineries located away from crude sources require crude oil inputs to produce refined oil products. Table 4.2 shoes the world‟s largest refineries by crude capacity. Almost half of the refineries are located in countries that do not produce crude oil or are distanced from crude sources. They are namely South Korea, India, Taiwan, the Netherlands, and Singapore. Most of these refineries are located in the Eastern Hemisphere or Asia region as seen in Fig. 4.2. In the case of Singapore, the biggest refineries are owned by Shell and ExxonMobil and are located in offshore islands. As Singapore is within closest proximity to the Middle East, also known as the Persian Gulf and passing through the Gulf of Oman, crude oil supply is mainly shipped from the Middle East to refineries located in Singapore. The materiality of crude oil is closely tied to the calibration of refineries‟ processing capabilities that are situated within regions of specific types of crude. For example, Asian refineries process heavier and sour Middle Eastern crude oil with high sulphur content such as the UAE Fateh (21.3% sulphur), producing „dirty‟ diesel and gasoil that are highly in demand by industrializing nations such as China, India, Vietnam, Thailand and Myanmar. These countries are situated within the Eastern hemisphere or Asian region where Dubai/Oman crude oil inputs are within closest proximity. The production of refined oil products in Singapore, mainly gasoline, naphtha, gasoil, bunker fuel and kerosene, are largely for and sustained by exports to the consumptive markets in the region, especially to Southeast Asia. 66 Refineries, such as those in Singapore, have to purchase crude inputs and manage their refinery margins. Refinery margins refer to the difference between the price of refined products and the per volume cost of crude inputs. Hence, price is critical in affecting the potential profits made through the sale of refined oil products and also the volume and type of refined oil outputs produced. The prices of oil sold and transacted between parties or exchanges are based on benchmark oil prices published by Platts. These benchmark prices are determined through a trading process conducted via the Platts eWindow interface where major actors in the oil industry, such as IOCs and oil trading firms, actively participate. The prices of these trade transactions are then assessed and published as regional benchmark prices for Asia, U.S. and Europe. The inherent geographies within the trading of material oil and benchmark pricing will be further examined in the following section. 4.3 Geographies of trading of material oil and benchmark pricing The production and trading of crude oil and refined products are predicated on demand-supply and surplus-deficit of oil, where price plays a critical role in mediating these processes. Trading of crude oil in the spot markets is understood to reflect the state of real demand-supply balance. A spot market embodies “ all spot purchases and sales agreed within an area where there is a significant concentration of trading activity in one or several products” (Wauquier & Favennec 2001:86). In these spot markets, purchases are instantaneous transactions or agreements concluded for participants to sell or buy one shipment of oil under a price agreed upon 67 at the time of the arrangement (Energy Information Administration EIA). Spot markets for crude oil are found in New York, London, and Singapore. These nodes represent a macro-region and concentration of large numbers of spot deals transacted through bilateral mutual agreements, known as over-the-counter (OTC) deals (see Appendix I). With reference to Wauquier & Favennec (2001), Fig. 4.3 demonstrates a strong regionalization of benchmark crude oils. These are macro-regions that refine crude oils extracted from within the region namely West Texas Intermediate (WTI) in the U.S., Brent crude in Europe and Dubai/Oman crudes in Asia. The historical development of crude benchmark pricing was a response by giant oil multinationals, such as Royal Dutch Shell, British Petroleum, and Chevron that dominated the world oil industry prior to 1971, to counter volatile crude oil price swings led by OPEC countries (Davis 2006). Fig. 4.3 Map of major spot markets and benchmark zones 68 OPEC is a prominent intergovernmental institution formed in 1960 by five main oil producing member countries (Iraq, Iran, Kuwait, Saudi Arabia and Venezuela) to counteract downward pressures on crude oil prices and payments to OPEC members by oil multinationals. The OPEC formation has led to the nationalization of oil assets and a stronger, collective control over crude oil prices amongst these member countries (Al-Otaiba 1975). As such, crude benchmark pricing was a way to mediate the power of OPEC countries over the control of their crude oil prices. The benchmark pricing mechanism provides a yardstick or a common denominator for price referencing in oil trading and also pricing of oil products for sale. The benchmark prices of WTI and Brent crude oil are derived from the futures market and also spot transactions through Chicago Mercantile Exchange Group (CME Group) and Intercontinental Exchange (ICE). Other than crude oil, active spot markets for the trading of refined products are founded mainly in these areas: Amsterdam-Rotterdam-Antwerp (ARA) for Northwest Europe, New York and Gulf of Mexico (Houston) for the US, and Singapore for Asia. With two of the world‟s largest oil refineries (see Table 4.2), Singapore is active in refined oil product distribution and trading. Singapore embodies a high concentration of oil industry actors and activities. Furthermore, daily evaluations of traded prices via Platts are published in Singapore. These final evaluated prices are the benchmark prices of oil for Asia. Hence, Singapore marks a requisite location to explore the social negotiations of the actors and geographies involved in trading of material oil and benchmark pricing. 69 4.3.1 Trading of material oil in Singapore: Spatiality and networked negotiations According to Fesharaki (1989), oil trading has always been part and parcel of Singapore‟s oil industry. During the 1970s, most of the trading activities for both crude oil and refined products were undertaken by IOCs‟ refineries in Singapore. As shown in Fig. 2.1, IOCs are major actors in oil trading especially so in Singapore as it has two of the world‟s largest refineries located offshore from the main island. Given Singapore‟s considerably small local demand for oil, there are surplus refined products available for export to the region. This can be seen in how oil major Royal Dutch Shell chose Pulau Bukom in Singapore as the location for its largest refinery in world, producing an estimated 500,000 barrels-per-day. This locational decision has made Singapore a key regional supply and trading centre for the Shell Group in the East, with 90 percent of its products exported to countries in the Asian region and beyond (Shell Singapore). Indeed with Singapore‟s strategic location in Asia, deep water port terminals, refining and petrochemical facilities, regional storage of more than 100 million barrels of oil, and strong government support through the Approved Traders Scheme since 1989, Singapore is a „natural‟ location for oil trading, processing, distribution, storage and pricing centre (Hong 2007, Lee & Lee 2008, IE Singapore 2009). Today, other than IOCs, Singapore‟s oil industry evolved to include a complex array of actors from investment banks with proprietary trading6, brokers to other supply and trading firms (see Table 4.3). 70 Table 4.3 Partial listing of firms involved in oil trading based in Singapore Firms with refineries facilities Koch Refining International Pte. Ltd Royal Dutch Shell Exxon Mobil BP Chevron Singapore Refining Corporation Singapore Petroleum Company Ltd National Iranian Oil Emirate National Oil Company Statoil BHP Billiton Singapore ConocoPhillips Singapore Energy/oil supply, trading, broking firms Vitol Asia Pte Ltd Addax Asia Pte Ltd Aspen Oil Broking (Singapore) United Oil Company Concord Energy Pte Ltd PVM Oil Associates Fair Energy Asia MF Global Mercuria Energy Group Ltd SK Energy Hin Leong Trading Pte Ltd Chemoil Ginga Itochu Sumitomo Corporation Marubeni Singapore Glencore Trafigura Financial institutions with proprietary commodity and energy trading J. Aron & Company ( Goldman Sachs) Morgan Stanley Deutsche Bank Barclays Capital JP Morgan SEA Ltd Merill Lynch Credit Suisse ABN Amro DBS Vickers Standard Chartered With reference to Fig 2.1., Singapore has an active OTC market whereby transactions are conducted via bilateral contractual agreements between two parties. Given the diversity of OTC participants and how the nature of the OTC market is based on bilateral trade, “it is essentially P&C [private and confidential]. So it is impossible to get a 100% accurate sampling of how big the OTC market, who is doing or has done what” (Trader K). 6 Proprietary trading pertains to a bank‟s trading activities for its own account and is a critical engine of profit growth for the bank (Endlich 1999). 71 In the OTC market, the process of negotiating and settling of bilateral contracts are underlined by networked relations, especially that of interfirm and inter-personal contacts. Hence, the brokers who “match clients‟ needs” and “manage relationships with clients and being on the ball with market changes and requirements” (Broker A) are immanent in facilitating trade transactions between oil majors, supply and oil trading firms, crude producers and investment banks. In oil trading and production, strategies and decisions are mediated through knowledge and information exchanges embedded within these networked relations. This is noted by Trader B with more than 20 years of experience as a trader for a refinery and also oil trading firms: Interactions is on a daily basis … networking is mostly based on personal contacts. As traders, we need different views and information, sometimes you get information over chit chat with other traders...Sometimes we need to travel abroad, for example, to talk to people in Kuwait or Middle East…a good oil trader would know much earlier…for example, a temporary closure of one other refinery for maintenance, decrease in production, less supply available in the market…what do the prices off NYMEX (CME), ICE, Platts and other reports tell you? You round it all up, strategize, take your position on what to buy or sell or what is to be refined. Trader B added further how it is advantageous to be located near existing refinery facilities, oil majors, shipping firms and banks because of the ease and accessibility for business discussions and knowledge exchange amongst key actors in Singapore and the region. As such, Trader B declared how this advantage “is so compelling that it becomes a need to be situated within the oil community here [Singapore]”. As postulated by Henderson et al. (2002) and Hess (2004), the relations within networks are embodied within distinct 72 spatiality and multi-scalarity. This embodiment is manifested in how Singapore, as a central location in the process of oil trading, exudes in the network embeddedness that extends into the wider Asian region. Furthermore, information and knowledge networks are vital in oil trading maintained through networked relationships between actors that in turn constitute the „structure‟ of oil trading (Dicken et al 2001). Central to this „structure‟ is the role of Platts in the production of knowledge and information of and for the oil industry. Platts produces news and journalistic reports and, more importantly, evaluates and publishes daily refined products prices for Singapore and the region via the Platts Market-On-Close (MOC) assessment process. However, the role of Platts has been ignored by many papers and reports written about the Singapore oil industry (Ramasamy 2006). As such, the significance of its daily oil price assessment and provision of news and reports on and for the oil industry are consequently overlooked and undermined. The following section seeks to expound the significance of Platts, uncovering its constant interactions and power relations with key actors in oil trading such as IOCs and energy/oil supply & trading firms and also investment banks. 4.3.2 The role of Platts: Circulation of market information and benchmark pricing in Singapore Platts was acknowledged by all interviewees in my research in its provision of timely information on the oil market. To them, the oil industry and the process of oil trading predicates on both the quality and quantity of information. As expressed by Trader J, “the more information, the better”. Platts is a publishing company that disseminates news reports on the global oil 73 market through their Platts Global Alert online interface for real-time news updates and Platts Oilgram News. Other reporting agencies such as Petroleum Argus and Reuters are also part of the dissemination and circulation of news and information. Here, market information is turned into codifiable, commodifiable and tradeable knowledge that can be transmitted mechanically or electronically (Hudson 2001). To ensure the most updated circulation and perpetuation of market information regionally and globally, Platts is predicated on “real time” telecommunications in suturing localities to global and other regional „spaces of flows‟ that move at the speed of light (Zook 2005, Warf 2009) formation This Platts-mediated knowledge becomes ubiquitously available as access is easily available upon subscription to the information service provider. As noted in Clark and Wόjcik‟s (2003) assessment of financial investment decisions (2003:911) assessment of financial investment decisions in relation to financial market information, most market traders in the oil industry have access to very much the same market information, irrespective of whether they have doubts about the information‟s relevance, integrity and veracity. Hence, the degree of accuracy and trustworthiness of the information is extremely critical for trading strategies and decisions. My interviewees have noted that news and reports generated by reporting agencies: …gives you a feel and those guys tend to find it after the event… a lot of reporting companies are like newspapers, the news tell you what happened yesterday or a few moments ago…you can say it is over by the time you get is on the news… deals are done…but a lot of reporting companies do give you good statistical information, more historical rather than on where things are going…but you still need those news, they balance your views but as much as that…stuff they don‟t know might just be the more important stuff… (Trader G, my emphasis) 74 Here, Trader G expressed that although news and reports are disseminated via “real time”, they are in fact usually dated. Furthermore, the quality and accuracy of information provided by these reporting agencies require further investigation. The process of producing these discourses resides within the power relations between reporters and other actors in the oil industry (mainly oil traders). The information published in news reports is the knowledge derived from many phone calls and interactions between the reporters and oil personnel they manage to contact. In fact, oil traders and other corporate personnel in the oil industry have the power to withhold information from or release to reporters in view of protecting their trade positions and/or pursuing intentions to influence market sentiments. This can be seen in how: We [traders] get calls from reporters from Platts, Reuters, Argus all day. Trying to find out our views of the market and report on them… but you know traders, we lie all the time… there are information we won‟t and can‟t say…well, it is business and we have to secure those trades at the end of the day, why should we share? (Trader A, my emphasis) Trader A and Trader G have thus revealed the questionable quality and trustworthiness of the market information, circulated in and for the oil industry by reporting agencies, as have Clark & Wόjcik (2003) on financial information and discourses. My intention is here is not to discredit such market news and reports, but rather to elucidate the power relations deepseated in the production of market information published in news and reports. Not only is information gathered by reporters „subjected‟ to the other traders‟ willingness to share knowledge, but also the degree of “truth” and integrity of the information divulged. Hence, the importance of tacit knowledge in the oil 75 trading and business decisions or strategies of the oil industry confirms Maskell & Malmberg‟s (1999) observation on the increasing centrality of tacit knowledge in sustaining or enhancing the competitive position of firms due to the intense circulation of codifiable (tradable) knowledge. In the oil industry and process of oil trading, “tacit knowledge” is negotiated through strong social and personal networks. These are performed in business practices such as client visits, informal meetings over coffee or lunch and private phone calls, all of which efficiently viable by situating in Singapore and within close proximity to other Asian countries (see also Sidaway & Bryson 2002, Wrigley et al 2003, Lai 2006). However, “tacit knowledge” remains subjected to underlying tensions within personal or social networks (Grahber & Ibert 2006). Oil traders who are engaged in „trustworthy‟ and reliable information exchanges through their social and personal networks would still withhold information or knowledge that may negatively affect their own trades, business opportunities, careers and even personal reputations in the oil industry. To this, Trader C, who has many oil trader friends in Singapore, claimed how “…business is business. You need to know and limit what information goes out to your counterparties because you might just jeopardize your position in the market”. Such overlapping layers of power within the information and knowledge network of oil trading are echoed through the Platts benchmark price assessment in Singapore as well. The significance of Platts in the oil trading and the oil industry stems mainly from its assessment of daily benchmark prices. This assessment operates via a market-on-close (MOC) process, where market prices of oil are 76 published at the close of every business day. The MOC process occurs at 4pm to 430pm (SGT) with market participants making final changes to their bids and offers placed before 4pm on the Platts eWindow. Platts mainly base their oil price assessments on spot transactions executed through the Platts eWindow because spot transactions reflect real demand-supply through the purchase and sale of material oil. However, the assessment of benchmark prices also takes into consideration the prices obtained from the trading of oil derivatives as well. After the half hour period, all transactions via the Platts eWindow for the day are evaluated in the Platts Singapore office and finally Platts would: publish every piece of information that goes into our final assessment. Every company that bids, every company that offers and every trade that gets done. We name the companies, we publish the volumes, which means the assessment is very … as what we call very transparent. Everybody knows how we get to our assessment every single day. This is very important to our credibility as a publishing company…because ultimately those values are going to settle the long time supply contracts, spot supplies and other contracts as well, including those derivatives contracts, so people have confidence that our numbers represent a real value. They need to know what is going into that process. (Platts Senior Executive, my emphasis) 77 Table 4.4 Major market players ( ≥ 3% participation by trade volume ) in various crude and refined products MOC [from Jan-Jul 2009] Name of Company Type of company (%) participation by trade volume of respective refined oil products Middle East Asia Asia Asia Asia Fuel Asia Naphtha Crude MOC Gasoline Gasoil Jet oil Royal Dutch Shell Integrated oil company 7 13 19 10 21 4 Vitol Glencoren International Energy & Commodities Trading Firm 3 14 10 9 29 14 Energy & Commodities Trading Firm - 19 17 8 9 - 19 16 6 - 17 BP Integrated oil company - Hin Leong Trading Pte Ltd Oil supply & Trading Firm - - - 37 21 18 Trafigura Energy & Commodities Trading Firm - 4 7 9 - - Morgan Stanley Investment Bank 8 - - - 10 - Total Integrated oil company - 8 - 9 - - PetroChina National oil company subsidiary - - - 3 - 11 ConocoPhilips Oil Supply & Trading Firm - 6 - 4 - - Sempra Energy Oil Supply & Trading Firm 4 - 6 - - - Mercuria Energy Group Ltd Energy & Commodities Trading Firm 23 - - - - - Philbro Energy & Commodities Trading Firm 22 - - - - - SK Energy Oil Supply & Trading Firm 15 - - - - - Itochu Corporation Energy & Commodities Trading Firm - - 10 - - - Kuo Oil International Oil Supply & Trading Firm - - - - - 10 Cargill Inc. Energy & Commodities Trading Firm - - 8 - - - Arcadia Petroleum Ltd Oil Supply & Trading Firm - 6 - - - - Westport Resources Corp. China National Offshore Oil Corporation Oil Supply & Trading Firm - - - - - 4 National oil Company 3 - - - - - UNIPEC Chevron Chevron Corporation National oil company trading subsidiary 3 - - - - - Oil Supply, Trading & upstream services firm - - - - 3 - Lukoil Oil Company Integrated oil company - - - - - 4 Adapted from data presented at Platts Annual Crude and Refined Products Forum 17-18 78 These evaluated daily benchmark prices, known as the Mean of Platts Singapore (MOPS), are widely used to settle oil contracts and even oil derivatives not only in Singapore, but also in Asia. Hence, there is an intrinsic centrifugal influence of MOPS generated in Singapore in Asia‟s daily oil transactions. As noted by Oil Finance Executive A: Platt‟s prices gives a benchmark… for example, when people transact or deal, they will say I charge you Platts plus USD 4.65 per barrel or Platts minus USD 2 per barrel You are free to negotiate around that benchmark. But overall, regardless of who you trade with in Singapore, Thailand, Taiwan or Myanmar in the region, Platts is the general indication level of the market price… that‟s the marker… Table 4.4 shows the percentage of participation of respective firms delineated by their trade volume in the Platts MOC process from January to July 2009. From the table, it is clear that integrated oil companies (e.g. Shell and BP) and energy/oil supply and trading firms (e.g. Vitol, Glencore, Trafigura, and Singapore based Hin Leong Trading) dominate the MOC process with more than 20% of participation in crude or a specific refined oil product. This means that the larger volume and the corresponding prices of their trades are eventually evaluated in the MOC process. Hence, this wields greater influence over benchmark prices as compared to the smaller volume and the transacted prices of other participants‟ trades. Although the large volume of trades may purely reflect the prominence (and dominance) of certain actors in their demand and supply of oil, the „intentions‟ to influence the oil market behind these trade volumes cannot be dismissed. 79 Trader H explained that some participants trading via the Platts eWindow: …are abusers of this mechanism. Top companies that have misrepresented or distorted or tried to game the system and try to take advantage, were disciplined and boxed… Platts have rules… and even major oil companies such as Shell were boxed. To minimize this abuse, Platts has to maintain its credibility by ensuring that trades on its eWindow are complete transactions (i.e. trades are followed through and honoured by respective parties) and by placing „abusers‟ of the system “under-review”. These „abusers‟ are not allowed to trade for a specified time period till further notice from Platts. The function of Platts as a reporting agency is founded on providing informed assessments on oil market prices and sustaining integrity and transparency in the assessment process. However, its ability to bar participants from trading on their eWindow (i.e. “under-review”) suggests a degree of institutional power in regulating oil prices and the oil market. Oil traders are very much aware of Platts‟ quasi-regulatory power in the oil industry, especially when it barred the now defunct Lehman Brothers from participating in the eWindow in July 2008 when bank had shown no signs of defaulting payment or inability to complete trades (International Herald Tribune 10/07/2008). Trader H commented on the quasi-regulatory power of Platts: … Platts takes it to another level… before Lehman Brothers went under, about a month before, Platts did not take any of Lehman‟s deals..and they did the same thing awhile with J.Aron Goldman Sachs and Morgan Stanley. They said these companies are on the firing line, we are not going to consider their transactions, they can get on the window but we are going to ignore whether or not they buy or sell. They have since lifted the ban but sometimes Platts over does its role as a regulator. 80 More generally, the institutional nature of Platts echoes the notion of embedded knowledge networks (EKNs) similar to major debt-rating agencies, such as Moody's Investors Service (Moody's) and Standard and Poor's (S&P) (Sinclair 2000, 2005). In fact, Platts is part of the McGraw Hill group of companies which also owns the financial credit rating agency, S&P. EKNs produce knowledge outputs such as ranking, rating and some sort of recommendation; Platts produces news and reports and „recommended‟ benchmark trading prices of oil and oil products. As stated earlier, these benchmark prices are widely used and accepted by oil traders where “…the judgements produced acquire the status of understood facts in the market… because of the authoritative status market participants and societies attribute to the agencies” (Sinclair 2005:18). Here, the prominence of Platts benchmark prices and the MOC process in influencing how oil trading operates in the global oil industry (i.e. London, New York, Singapore) can be deemed as the mental framework of oil benchmark pricing orthodoxy7. With regards to Sinclair‟s (2005:15) review on rating agencies, Platts‟ quasi-regulatory power emanates from the ability to “adjust the ground rules” of oil trading via its eWindow. Platts performs its views on what is acceptable or otherwise in trading procedures by enforcing bans and deciding on which trades are justified in the oil price assessment. However, as much as Platts has the power to control trading activities and actors on 7 Sinclair (2005) pointed out how rating agencies has gained hegemony in influencing the ways of thinking in the modern markets and hence, referred as the mental framework of rating orthodoxy. 81 its eWindow in the relatively “unregulated world of oil trading” (Trader A), it remains deeply situated within the power relations of oil trading per se. Although actors in the oil industry do seem to be subjected to Platts‟ unparalleled market pricing mechanism and corresponding “regulatory decisions”, the ability and function of Platts in providing benchmark prices is fundamentally sustained through their participation. As mentioned in Section 2.5.3, EKNs are analytical and judgmental systems that are endogenous and legitimate entities in a community of actors. In other words, EKNs are sustained through the negotiations and acceptance of actors in a particular industry. Platts‟ services relies on the active participation of these actors in the oil industry and even consult them to ascertain which oil products or contracts should be assessed or taken out of the MOC process. This reveals how the function of both Platts and the respective businesses of the global oil industry (ie. oil trading, refining and supplying oil) are sustained interdependently, amidst deeply embedded within layers and constant negotiations of power. 4.4 Concluding comments This chapter has elucidated the geographies and power relations in the trading and production of material oil, focusing on the significance of information flow and benchmark pricing in shaping these processes. In praxis, the trading and production of material oil is deeply intertwined with another critical process; oil derivative trading or the trading of paper oil. In fact, the prices of the OTC derivatives such as swaps transactions are assessed 82 alongside the spot prices of material oil transactions in the Platts benchmark price assessments. Hence, oil derivative trading does have a critical and real impact on the assessment of the benchmark prices (i.e. MOPS) in Asia, as seen in how: In the end, all the transactions are done up to Platts and the numbers come from paper transactions as well as physical transactions, so there‟s convergence, which also means if there is a lot of activity on the paper side with prices are shooting up, ultimately the price of the physical oil would rise as well… and that was particularly highlighted last year in 2008. (Trader G) This observation is linked to the alleged claim that an increase in oil derivative trading would have contributed to the price spike in oil in 2008. The significance of oil derivative trading in the global production network (GPN) of oil is founded on hedging against market or price risk to which both the trading and production of material crude oil and refined oil products are highly exposed to. To underscore the significance of finance as per oil derivative trading in the oil GPN (see Fig. 2.1), I seek to uncover the socio-spatial negotiations of oil derivative trading and also its interdependence with the trading and production of material oil in the next chapter. 83 CHAPTER FIVE: UNCOVERING FINANCE IN THE GPN OF OIL: ‘THE END OF GEOGRAPHY’ OR GROUNDED INTERDEPENDENCE? 5.1 Introduction As explained in Chapter 2.5 and depicted in Fig 2.1, finance is significant to the global production network (GPN) of oil in supporting the process of oil trading and production. This can be seen in how finance involves credit loans to fund purchases of oil cargoes, financial risk management consultation and the trading of oil derivatives. Hence, finance is sustained by the needs of the oil industry for credit loans and also the management of profit margins of oil trading via hedging against market price volatility. Risk management is essential because daily price fluctuations reflected in the daily assessed benchmark oil prices affect the prices of oil cargo in transit and the selling price of material oil for the day. This chapter seeks to explicate the interdependence between the trading of oil derivatives and the trading and production of material oil. I purport that the notion of interdependence within these processes are grounded within tight social networks and personal relations and also founded in specific locations such as in Singapore. This is especially so for oil derivatives transacted through OTC (i.e. private bilateral transaction between two actors or counterparties). Furthermore, with reference to Fig. 2.1, this chapter also seeks to reinforce how finance in the GPN of oil is not embodied through an arbitrary virtual and electronic space, but is in fact 84 executed through designated virtual nodes and prevalent electronic platforms of organized exchanges of CME and ICE respectively. 5.2 Financing, financial trading and the financial market for oil Finance in the GPN of oil is deep-seated in the provision of financial credit services. These are vital in supporting the processes of oil trading and production that are highly capital intensive. The purchase of a cargo of crude oil which equates to 1 million barrels would cost around US$75 million based on oil prices of US$75 per barrel in the second half of 2009. According to an oil industry insider, this marks a need to: …obtain financing… so that it will cover the tenure time that you own the cargo… financial services are absolutely essential; access to banks and credit and so on are very important to the functioning of the oil industry. Last September 2008, the financial crisis, trading volumes fell because credit was tight… when you lose the credit, you lose the ability to buy and sell oil and then everything just falls apart… (Oil finance executive B) With the substantially large amount of capital necessary to finance the purchase of oil, oil firms require the support from financial institutions, specifically established American and European banks. To this, Trader L noted how: Singapore financial institutions are not able to take that kind of risk that the big Western banks do…the bulk of financing comes from them and their regional headquarters in Southeast Asia are here in Singapore. Furthermore, other than some government restrictions on what they can do, money can flow relatively easily in and out of Singapore as well.. you can‟t do that in Jakarta, Thailand and certainly not in China or Japan. 85 As a global financial node and a vibrant oil trading centre, Singapore represents both a strong node of interdependence between the operations of the oil industry and the established global and local financial institutions. Various traders whom I have interviewed acknowledged how the “relatively hands-off policy towards the oil industry” (Ramasamy 2007:35), ease of capital flows, and pro-business policies such as the Global Trader Programme8 have supported and led to the high concentration of oil trading activities within Singapore. Hence, it is this interdependence between oil firms‟ need for credit loans and financial institutions and the extension of financial services to these oil firms that sustains Singapore‟s vibrancy and position in both the financial and oil industry regionally and globally. With reference to Chapter 2.5, finance also involves the trading of oil derivatives in the oil industry. Derivative contracts are based on the financialization of underlying assets, such as crude oil or refined products. These financialized paper contracts derive their principal source of value from the particular asset that they represent (Kolb & Overdahl 2007). The financialization of oil was perhaps first marked by the world‟s first future contract for heating oil in 1978 which followed by the first crude oil futures contract in 1983 by NYMEX (now part of the CME Group). These oil derivatives were developed to provide hedges against price risk in fear of the OPEC-led price shocks in the 1970s. 8 The Global Trader Programme, launched in June 2001, is a merger of the Approved Oil Trader (AOT) and theApproved International Trader (AIT) programmes which started in 1989 and 1990 respectively. There is a 10% concessionary tax rate is given to GTP companies on their qualifying offshore trading income (IE Singapore GTP Brochure). 86 The financialization of oil and the demand for these oil derivatives h a s in turn led to a consolidation of a financial market for oil. Other than hedging, the financial market also fundamentally offers three critical economic functions for the oil industry (see Fabozzi 2002). First, it provides a market-determined price on a financial instrument as per oil derivatives. Second, the market offers liquidity evident in an assemblage of buyers and sellers in the futures exchange market or the over-the-counter (OTC) market. Liquidity is critical as an oil firm doing a hedge requires buyers who are willing to take its risk and sellers who are able to offer a contract. Third, the reduction of transaction costs through trading of paper contracts in the purchase of crude oil or refined products can be done via a futures contract that promises delivery of crude oil or refined oil on a settlement date. This means that, prior to the settlement date, credit is freed up for other trading or operation activities as full payment is due only on the date of settlement of the futures contract. In all, the financial market for oil provides a platform through which the oil industry obtains reference oil prices of traded oil derivatives, access to liquidity required for trading, and cost savings by transacting and purchasing oil via a futures contract. Although trading oil derivatives through an organized exchange can be executed 24 hours round the clock, from anywhere in the world as long as one has an internet access to the virtual and electronic CME Globex or ICE platform, the notion of “the end of geography” (O‟Brien 1992) remains a prevication. While the virtuality of finance may have annihilated space, it has 87 by no means undermined the significance of location, of place (Martin 1999:15, emphasis in original). Financialization, similar to commodification, is intrinsically spatial in that the production, trade, and consumption of the derivatives occur in, involve, link and produce particular spaces (see Nevins & Peluso 2008). Hence, rather than understanding the process of trading of oil derivatives as constituted broadly through virtual and electronic space, I purport that there are distinct locations in which trading of oil derivatives are concentrated in. This is reflected in the prevalence of organized exchanges, specifically CME and ICE, which are widely accepted and utilized by actors who trade oil derivatives as per futures contracts. Other than exchanges, trading of oil derivatives is also executed through OTC transactions (i.e. bilateral negotiations between two actors) which are negotiated through tight social networks and personal relationships that have been highlighted in Chapter 4. 5.3 Hedging through oil derivative trading: Socio-spatial negotiations of exchanges and OTC transactions As conceptualized in Fig. 2.1, oil derivative trading is a complementary process in the production and trading of material oil. Key actors involved in this process that require hedging for their business operations in production and trading of refined oil products are IOCs and oil supply and trading firms. IOCs and oil supply and trading firms constantly face market or price risk that is often hard to quantify and manage (Global Association of Risk Professionals 2008). This is because oil prices, in reflecting demand and supply of oil, are exposed to dynamic changes in the economy and even weather conditions such as prolonged winters. 88 To manage price risk, IOCs and oil supply and trading firms often employ trader to hedge their cargoes via the futures market (ie. organized exchanges) or through OTC transactions. The decisions in trade executions by these oil traders are underlined by dense information and knowledge networks. All the oil traders whom I have interviewed pointed out that it was not necessary to be located within or near other firms and corporate personnel because phone calls and Yahoo! messaging online are adequate to facilitate information and knowledge of the markets. However, some have stressed the „convenience‟ and „advantage‟ to be situated in a location that has an active oil market such as that of Singapore. As Trader F explained: …well, technically you don‟t need to be located where the market is, but yes, it does help that you do, even if you are solely a paper trader. In Singapore, there are more than 200 companies that trade oil…you can just walk out of your office block and just meet some oil traders or brokers along the way…so the information network here is really strong…everybody is sharing and trying to get information all the time…So if you are removed from that, you just don‟t get that kind of information flow…And yes, it is basically a tight network…everybody is guessing what everyone else is doing and fundamentally follows how much demand and supply there is… The quote above illuminates how knowledge and information required in oil trading as a whole and the trading of oil derivatives in particular is embedded in social networks between traders, oil brokers and other related personnel situated in Singapore‟s oil industry. With regards to economic geographical work on the spatiality and embeddedness of knowledge circulation within industrial communities and clusters of innovation and tacit knowledge transfers, the significant social networks centred in Singapore mark an impetus for oil traders „being there‟ in order to gain the latest information and knowledge of the regional demand and supply of oil (see 89 Gertler 2003, Maskell & Malmberg 1999, Malmberg & Maskell 2002, Bathelt et al. 2004, Gertler & Vinodrai 2005). In the process of oil trading, being located in a place like Singapore matters in gaining up to date and reliable information and knowledge that potentially benefits both trading and also oil production strategies and decisions. As noted in Chapter 4, prices are central to the process of oil trading. Prices are determined by the market (comprised of trading both material and paper oil) and undertaken by traders and their respective firms in trade transactions. The relationship between material oil and paper oil with regards to price has been described by Trader C as a pyramid: Think of it as a pyramid… wet oil determines the price, next up OTC swaps, next up futures, next up options… it‟s a pyramid because at the end, a derivative basically has its value from the real commodity itself…swaps prices by physicals, and the other way around…that‟s why there is convergence… The metaphor of a “pyramid” does not only emphasize how wet/material oil is the basis of oil derivatives, but how production and supply of material oil in response to demand underlies the basis of oil trading as a whole. The pyramid is thus symptomatic of the oil GPN explained in Chapter 2.5; it is constituted through the interdependent blocks of processes that build upon each other. This inherent interdependence of oil derivative trading and the trading and production of material oil is best illustrated from the perspective of an IOC with refinery operations. A refinery owned by an IOC requires crude oil inputs to which its trader bought a cargo of crude oil (i.e. one million barrel of crude) at a price confirmed and settled only on the date of loading onto the shipping vessel. As the price of crude oil is exposed to 90 market price fluctuations in the time incurred before the loading date, the trader will then hedge with future contracts through organized exchanges such as CME and ICE. The buying and selling of oil futures enables the trader to counteract price fluctuations in the market that would in turn affect the future purchase price crude oil. Other than hedging via the futures market, it is also possible for the trader to buy a put option and determine a strike price. A put option gives the trader a right but not an obligation to sell at the strike price, so as to provide an insurance against substantial losses when oil prices fall far below the strike price. Options are available on the organized exchanges or can be transacted through OTC. Other than managing crude prices, a similar process of hedging is also reflected in managing the prices of refined oil products as well. This is important to a refinery because market prices of refined products would affect the profitability of its production; low product prices would mean profit loss for a refinery that has refined crude input bought at a high price in an earlier time period. As such, the trading of oil derivatives is a critical aspect of oil refinery operations in the management of refinery margins (see Chapter 4.2). The significance of oil derivative trading in the GPN of oil is highlighted by the imminent risk that traders face without its existence: About 20-30 years ago, there wasn‟t a futures exchange. What we do is buy a physical cargo and then wait out for potential buyers after oil is refined… the loading date sets the price and hence gives rise to the first cost incurred on buying oil cargoes…If you buy in April, by the time it reaches your refinery, and the time required processing the oil, you can only start selling in early May. Markets and the economy would have moved by then so you need a hedge to fix margin. If you ship from Dubai, it takes 2 weeks, Nigeria about 3 weeks and Venezuela about a month…in this case you can say geography and 91 location gives rise to risk; exposure to market movements that you cannot predict. It was risky and there was no efficient way to minimize potential loss. (Trader B, my emphasis) Trader B has identified how the distance and corresponding time taken for crude cargo to arrive in Singapore exposes the cargo to market price volatility. Hence, with trading of oil derivatives, it becomes viable to manage better one‟s price exposure in the oil market and gain better price security over cargoes in transit and also of production outputs. Furthermore, Trader B noted that oil derivative trading is central to oil production in minimizing price risk by trading oil derivatives via an organized exchange. Although the process of oil derivative trading via an organized exchange is conducted through a virtual portal and is easily accessible from any location via Internet connections, actors do gravitate towards the established organized exchanges of CME and ICE in trading oil futures and options. The prevalence of oil derivative trading in these exchanges will be discussed in the next section. 5.3.1 Organized exchanges: The prevalence of CME and ICE As established earlier, futures contracts are launched via organized exchanges such as CME and ICE alongside other options and crack spread contracts. These exchange-traded contracts are denoted by standardized specifications on the type of oil and quantity per lot and format of settlement. The clarity and transparency of contract renders fast and easy transactions as long as one abides by the contract specifications. To participate on the exchange, a membership fee (i.e. US$2,000 non-refundable fee for CME) and acceptance after passing through the exchange‟s due diligence and regulatory 92 procedures are required. Similar to Platts discussed in Chapter 4.3.2, there is a need to „regulate‟ actors and activity because futures-traded prices from a CME and ICE do constitute the benchmark prices of WTI and Brent for the U.S. and Europe and for other international markets. Organized formal exchange trading platforms are dominated by CME and ICE (see Appendix II), with Dubai Mercantile Exchange (DME) slowly gaining momentum since 2008. The reason for the prevalence of CME and ICE is founded on the acceptance of the exchange and high volume of contracts traded by users that are in turn central to the function of exchanges as seen below: …the reason why Asia does not have an exchange like a NYMEX (CME) or ICE … Tokyo Commodity Exchange (TOCOM) is tiddlywinks with very low volume, there is DME, that started to gain a little attraction… so it‟s starting to pick up but what is required is to get more liquidity and get people like us, refiners and other related companies to get started on hedging and trading on the DME. When we think of a futures contract, NYMEX and ICE come to mind. The Asian market is not comfortable with a futures exchange… you find that in many traditional companies, they do not like the idea…the existing OTC contracts are fine with them… (Trader H) Indeed, although Singapore is an active oil trading hub for Asia, it has little success in establishing an organized exchange, having to shut down the exchange twice in the 1990s due to lack of support from the oil industry and hence, few participants. Similar to embedded knowledge networks (EKNs) such as rating agencies, CME and ICE are also legitimized and gained status through acceptance of a community. The organized exchanges such as CME and ICE are sustained through their reputation and services supported by high volume of trades, effective and efficient technology, and easy access to the platform via Internet connection. Hence, amidst the virtual and electronic space of exchange-trading, oil derivative trading can be seen as „localized‟ 93 electronic within CME and ICE, revealing a sense of “locational embeddedness” (Sassen 2005). The notion of “locational embeddness” originally refers to t how electronic markets are imbricated within specific non-digital environments such as cities with global financial nodes. However, this concept can be extended to the virtual and electronic space, where exchange-traded activities are concentrated and founded within the specific exchange nodes of CME and ICE. Confirming this locational trend, the oil traders whom I interviewed have voiced their preference to trade via CME and ICE as these exchanges have been providing efficient and up to date services. The oil traders stressed how other exchanges are not necessary unless better services and contracts can be offered to aid price risk management. As Trader H has mentioned, future contracts are synonymous with NYMEX and ICE. Furthermore, the Exchange CEO, whom I interview, disclosed that oil trading in Singapore and Asia, more than 20 years back, were mainly transacted through private bilateral contracts where it is based on strong relationships, trust and reputation built across many years. With his 25 years of experience in working with organized exchanges in Asia, he attested to how many local and Asian firms still prefer and transact via „traditional‟ bilateral contract negotiations. They are not open to new contracts launched on the exchanges because “… the trades have always been done this way and what is there a need for change?” This shows how local and Asian “traditional firms” are fixated on conventional bilateral execution of oil trades and businesses. Due to the lack of support of these firms and their trades, the development of organized exchanges in Singapore 94 and Asia are thus unsuccessful or marked by low trade volumes. The legitimization, status and operation of organized exchanges, as per EKNs, are sustained by and dependent on the participation of IOCs, oil supply and trading firms and the likes in utilizing their services and contracts. These actors in turn depend on these services and contracts on the exchanges for hedging and risk management purposes. This echoes a mutual effect and interdependence in the functioning of both organized exchanges and the trading and production of material oil. Oil trading does not involve trading via organized exchange alone; OTC dominates the oil industry because it enables the customization of hedges that would suit one‟s risk management needs better. Other than futures and options, widely and highly utilized oil swaps are not traded via an organized exchange. In an oil swap, one party agrees to pay a fixed price for a given quantity of oil on a certain specific date in the future, while the other party agrees to pay the first party the market price for the same quantity of oil on the same date (E. Clark et al. 2001:100). As an OTC transaction is predicated on a private contractual negotiation and agreement between two counterparties, this process involves a high degree of trust, deep social networking and personal relationships that often require co-locations of key actors. However, organized exchanges also provide exchange-cleared OTC trades by acting as a guarantor so as to eliminate counterparty default risks that might occur in OTC transactions. The following section will assess the socio-spatial negotiations of OTC transactions, reflecting on how the process of oil derivative trading and the trading and production material oil are interdependent. 95 5.3.2 Over the Counter [OTC]: Networked negotiations and the advent of exchange clearing OTC (over-the-counter) refers to the purchase and sale of financial instruments not conducted in an organized exchange, therefore a direct in situ transaction between two counterparties (Fusaro 2002). Oil trading in Singapore remains largely dominated by OTC transactions as seen in its active refined oil product swaps market (Fusaro 2005). As elucidated previously, organized exchanges are recent developments dating back NYMEX in 1983 and ICE in 2000. Hence, prior to exchange traded derivatives, oil derivatives are mainly negotiated through OTC transactions. This has seen a concretization and preference of oil firms in private bilateral business transactions. Although OTC transactions enable better and customized hedge, there is a danger of counterparty risk where one party defaults payment or unable to deliver products as stated in the bilateral contract. It is therefore necessary to meet face to face at least once and to build up continual rapport and co-operation before OTC trades are subsequently negotiated through phone calls or internet Yahoo! Messenger. This has been explicitly highlighted by Trader F that: by meeting up, builds confidence with the counterparty. That‟s why traders do tend to congregate together…so places like London and Singapore are really the focal points of trading… it is about the community; you get more information exchange. Trust is important… you want to meet people and look them in the eye. That‟s the reason why location is important for traders… This resonates observations made in Section 5.3 where being located within an area with an established community of oil traders is critical to the process of oil trading because co-location of actors supports information and knowledge exchange. Trader D shared similar sentiments but explicitly noted how Singapore embodies: 96 …trading, refining, shipping… Here, you get physical traders and paper traders and those risk management and finance guys. Even as a paper trader, being close to refining operations is advantageous. You get to talk to the physical guys, get some upfront information on who is refining what and the volume to gauging the supply in the region. Same goes for the physical guy; in getting as much, as clear a picture of the markets… Both Trader F and Trader D have highlighted to how being located in Singapore meant accessibility to social networks; being able to interact and gain information and knowledge that may be useful for oil trading strategies and decisions. Trader D in particular pointed out how being in a location that hosts both production and trading activities such as in Singapore, translates into gaining fast, up-to-date and more comprehensive information on both oil trading and also production dynamics. On a similar note, Trader E revealed that his company was sending downstream functions of its Chicago corporate office back to headquarters in Houston to be co-located with its upstream operations. Meanwhile, it would relocate its supply and trading functions to downtown Chicago in order to be near to the financial institutions and to “interact more…to be situated where the action is and traders are”. The gravitation towards these specific locations can be seen to be marked by the presence of “local buzz” (Bathelt et al. 2004) where the clustering of key actors, facilitates intense interaction, social networking and obtaining up-todate information and knowledge. The notion of trust required in forging business relations and enabling collaborations cannot easily be separated from social contacts and information transmission within the community cluster of oil traders (Storper 1997, Cooke 97 & Morgan 1998, McKinnon et al 2004). The role of face-to-face meetings in constructing and reinforcing trust is exceptionally critical when negotiating and trading with a counterparty situated away from one‟s locale. As Trader H specifies how: …you got to put a face to a deal…building up relationships, rather than trading with an anonymous name on the screen. Your counterparty would need to know who you are as much as you do… counterparties do not need to be in the same location. Just make enough trips…Singapore‟s easy to jet around the region.. keep the dialogue on the relationship going…you know the Chinese term „guanxi‟? Initial contacts, trips and follow ups have to be done. After all, we don‟t just deal solely with one contractual transaction. You need to build relationships for future transactions. We chat about local markets and views on what‟s happening regionally or globally over the phone or Yahoo! Messenger… This interviewee (an expatriate) further added that OTC trades are negotiated through relationships built on the notion of trust in the establishment of guanxi or personal relationship (Yeung 1998a; 1998b) and networks. These are required in engendering a reliable basis for OTC transactions especially in Asia: All of those markets, here in Asia-Pacific, are relationships driven. You can have the best price to sell in Thailand, but if you don‟t kow how to do it, and who to sell to, might as well not bother. Since they do not know you, the chances are pretty good that they are not going to buy from you. It is all about who you know in the oil industry. And always will be. (Trader C, my emphasis) The above comments by the two traders highlight the centrality of trust and guanxi in OTC transactions. Relationships are built through face-to-face meetings in the exchange and consolidation of knowledges and information of the market and more importantly, of each other (Storper & Venables 2004, Grote 2008). Not only is spatial proximity to clients in Asia or in Singapore pivotal in the initial and also the subsequent contacts with counterparties 98 located in the same Asian time zone. It is the physical proximity of face-to-face contact that is requisite and can be easily achieved through flying up for visits (Gertler 1995, Oinas 2000, Morgan 2004). After establishing personal relationships, relational proximity to actors such as brokers, consumptive users and other traders beyond one‟s locality (i.e. within Asian region) is mediated through the ease of phone calls and the Internet. Through these conduits of information and knowledge exchange and personal relationships established on the basis of OTC transactions, perspectives and information on market prices changes and real demandsupply dynamics of oil are also „traded‟ between actors as well. Such information and knowledge, as noted by Trader B, are deeply valuable to refiners who will then be able to respond accordingly in their strategies and decisions in production (Torrance 2009). Hence, in the trading of oil derivatives, although technological advancements do bridge knowledge „gaps‟ through virtual connections via electronic interface (Leyshon & Thrift 1996a), tacit knowledge remains perpetuated and accumulated through a series of intense relations and active socialization (Lai 2006, Hall 2006, 2007). Even with established contacts, the risk of counterparty defaults does exist in all OTC transactions. For example, a firm may become unable to make payment and honour an OTC transaction due to the sudden tightening of credit in view of the recent economic crisis. Trader I claimed that it is not possible to gauge precisely counterparty risk. It is difficult to monitor a counterparty‟s position in the oil market because of the opacity of OTC transactions. To mitigate counterparty risk, organized exchanges offer clearing services such as 99 CME‟s Clearport, ICE Clear and Singapore Exchange‟s (SGX) Asiaclear (see Appendix II). A clearing service involves clearing members (namely financial institutions and banks) as central guarantors between two actors who decide to transact via OTC. With an exchange-cleared OTC transaction, both parties are guaranteed of payment or delivery of oil as the exchange absorbs the risk of any counterparty defaults. The function and establishment of such clearing services, similar to EKNs, are sustained by actors who utilize the service and who have gained membership to the organized exchange. This is reflected in the establishment of Singapore‟s AsiaClear during the financial credit crunch of 2008: Well, 5 years ago, in 2004, nobody saw a need for counterparty risk mitigation… People thought it was a lousy idea. Well, times change, especially in the recent financial crisis. Before that, people would not even talk to us… traders are the toughest people to change, you can give them the cure for cancer but no…I don‟t want to change…It sounds crazy but doing something different is difficult because we are used to doing it this way, and it works, so why do I have to do it in another way? (Exchange CEO) In 2008, SGX AsiaClear saw a 98% increase in volume of OTC trades and a 60% increase of counterparty accounts from the previous year (SGX press release, 14/01/2009). The comments made by the Exchange CEO illustrated the power and the resistance of actors in utilizing SGX AsiaClear services as part of their trading repertoire. However, in causing a widespread fear of counterparty and credit defaults, the 2008 financial crisis saw more actors accepting exchangecleared OTC transactions. This led to the success of AsiaClear, revealing how the function and establishment of an organized exchange and its services are highly context-specific and dependent on actors who utilize them. Conversely, 100 these actors are dependent on OTC clearing services to protect them from counterparty defaults. This reinforces the mutual dependence of actors, processes and even operations in oil trading and production. The trading of oil derivatives via organized exchanges and OTC transactions fundamentally exists due to risk management needs of IOCs and oil supply and trading firms. However, as noted in Fig. 2.1, investment banks and investors are also key actors in the process of oil derivative trading. These actors do not require hedging services but instead gaining profits and monetary returns through speculative activities via the trading of oil derivatives. The notion of value creation as per profit returns from oil derivative trading and the effects of speculative activities will be addressed in the proceeding penultimate chapter. 5.4 Concluding remarks This chapter has sought to instate the significance of finance in the GPN of oil by examining the interdependence between oil derivative trading and the trading and production of material oil through the geographies of exchange-trading and OTC transactions. Oil derivative trading via organized exchanges is not negotiated through an arbitrary virtual and electronic space, as it is grounded in prevalent nodes of CME and ICE. OTC transactions reflect how specific locations such as Singapore, with an established community of oil traders, remain critical in building trust amongst counterparties through social networking and personal relationships. 101 The metaphor of a “pyramid” effectively sums up the interdependence of oil derivative trading and the trading and production of material oil. However, the top of the pyramid has been deemed as increasingly „detached‟ from the fundamentals of demand (consumption) and supply (production) of oil. The trading of oil derivatives has become open to investors beyond the oil industry who seek profit opportunities. This can be seen in the rise in the number of investment funds created to attract capital in participation of oil derivative trading. Furthermore, hedge funds have also become deeply involved in speculative trading of oil derivatives. These speculative activities are often blamed to have caused the sharp fluctuations in oil prices. With reference to MacKenzie‟s meditation on the notion of performativity of economics (MacKenzie 2006a; 2006b), I seek to elucidate how although the performativity of oil derivatives yields different outcomes, these outcomes remain inherently part of the process of oil trading as a whole. In the following chapter, I seek to address, in the light of the 2008 debates on the price spike in oil, that value creation as per speculative activities, though a distinct process, should be understood as constitutive the socio-spatial dynamics of oil trading. 102 CHAPTER SIX: FINANCE AND SPECULATIONS: RE-VISITING THE SOCIO-SPATIAL NEGOTIATIONS OF OIL TRADING AND PRODUCTION 6.1 Introduction The trading of oil derivatives or paper contracts is limited not only to risk management and hedging purposes. It also involves the creation of value in the form of monetary profits. The trading of oil derivatives enables similar opportunities in cash profits as would buying and selling of material oil, except that the former can be attained without the incurrence of high logistics and storage costs (Clark, E. et al 2001:15). To this, IOCs and oil supply and trading firms do allocate traders who trade oil derivatives (i.e. paper traders) to manage the derivatives for hedging and also to speculate in view of cash returns. Such speculative strategies can be defined as leveraged investment in risky assets as per derivative instruments, or simply to capture price changes or price differentials of a commodity (Global Association of Risk Professionals 2008). The exploitation of price differentials in cash-based oil derivatives implies that an actor is able to trade solely in paper oil without being subjected to taking the actual delivery of oil. These actors provide the much required liquidity in the financial oil market, where speculators take on the risk that hedgers are trying to lay off (Bryan & Rafferty 2006:201) As KnorrCetina (2006) has noted, the financial market functions on the basis of the logic of investment and speculation. Indeed, speculation is a necessary raison d'être in creating liquidity for hedging to proceed. However, the participation of these investors in oil derivative trading is in turn noted to have opened up 103 the global oil market to speculative activities that are understood to distort market prices of oil (see Fig. 2.1). The 2008 price spike in oil has stoked debates on whether the oil price fluctuations and surges were led by fundamental demand-supply or speculative trading. The notion of speculation has been “demonized” by newspapers and reports as the fundamental cause of high oil price fluctuations and volatility. However, as noted by Trader J, It is not right to say speculation has caused nothing but volatility in the oil markets. In fact, oil traders welcome speculation as it sustains liquidity; more participants in the oil trade equate to more potential buyers and sellers, making it easier for you to sell or buy oil. Prices are also then more competitive. There is an increasing number of investment funds and the participation of more actors such as financial institutions and individual investors that seek to gain profits through oil derivative trading. This sea change in the industry has been indicated by Banks (1991:4) who claimed that “the orderly world of posted prices, price stability, and integrated firms had now passed from the scene, and replaced by price instability, uncertainty, and the commoditization and financialization of oil”. This process of oil derivative trading embodies the circulation and trading of paper contracts that derive their value from material barrels of oil. Other than paper contracts, the financialization of oil can be seen in the development of investment funds by financial institutions. Capital from these investments funds, pooled in from individual investors who seek to invest their savings, is then used in the trading of oil derivatives. Furthermore, hedge funds are also identified as perpetrators of speculative trading. The creation and proliferation of such investment funds and the aggressive speculative trading of hedge funds 104 can be seen as exposing the process of oil derivative trading (and oil trading as a whole) to financial processes beyond hedging and risk management practices. This chapter posits that value creation as per speculative activities, though occurs as a distinct process, remains influenced by market movements and production of material oil and in turn affects the market prices of oil. Through the notion of performativity of economics (Mackenzie 2006a; 2006b), I seek to instate how speculative activities aimed at value creation should be understood inherently part of the socio-spatial dynamics of oil trading. 6.2 Financialization of oil beyond hedging: Geographies of investments funds and hedge funds The trading of oil derivatives is a critical process that provides risk management for the production and trading of oil. Besides providing risk management consultation services and capital loans to IOCs and oil trading firms, financial institutions such as investment banks (i.e. Goldman Sachs and Morgan Stanley) are deeply involved in proprietary trading as mentioned in Chapter 4. Furthermore, financial institutions have launched and sold exchange-traded funds (ETFs) and commodity funds to mainly individual investors with savings who seek to invest their money. Examples of these investment funds are PowerShares DB Oil Fund and Lyxor commodities ETF. PowerShares DB Oil Fund is developed by a global asset management firm, Invesco PowerShares Capital Management LLC but managed by Deutsche Bank (DB) Commodity Services LLC. Hence, investors with investments in 105 DB can buy and sell shares based on the performance of futures contracts on Light Sweet Crude Oil (WTI). Similarly, investments in Lyxor commodities ETF, offered by a French incorporated company known as Lyxor Asset Management enables investors to gain „entrance‟ into the financial markets for commodities and energy (i.e. oil). The investment portfolios of these investors become exposed to derivative instruments such as commodity futures, warrants, swaps and options contracts. These asset management firms and banks are thus key actors in the production and circulation of financial products that are based on the performance of oil prices and even stocks of oil firms. This production and circulation mirrors the production and trading of manufactured tangible goods (Dicken 2007). However, the materiality of these investment funds does not lie in their tangibility as objects, but is constituted by complex relations among such actors and entities as banks, relationship managers, brokers, investors, social relations, legal systems, brochures and electronic trading platforms (see MacKenzie 2007). More importantly, these negotiations and information and knowledge networks are also inherently spatial. This can be seen in how access to investing in these funds are limited to and enabled through local brokers such as DBS Vickers and UOB Kay Hian in Singapore who actively promote such investment opportunities to investors and clients situated locally or in the region. The brokers then invest in these funds on behalf of their clients. Furthermore, the availability of such investment funds is also limited to certain countries. For example, from the Lyxor Asset Management website, the Lyxor commodity ETF is only available to countries with a local 106 information contact in Europe (UK, Spain, France, Germany, Austria, Italy, and Switzerland) and Asia (Hong Kong and Singapore). Indeed, investment funds are mainly made accessible to specific locations with supportive specialist knowledge and technological expertise (see Agnes 2000, Tickell 2000) such as Hong Kong and Singapore that embody a large concentration of financial institutions, operational support and also a ready pool of investors. The financialization of oil as per investment funds thus remains located in financial nodes in which their availability, accessibility, and management are „materialized‟. Although investment funds are a distinct process that involves managing investors‟ money, their investment in speculative trading remains fundamentally dependent on and tied to the trading of oil derivatives. Hence, an increase investments pooled into these funds would be translated into an increase in volume of paper oil bought or sold for such speculative purposes. Hedge funds, similar to investment funds, embody specific socio-spatial negotiations that are constitutive of the sociospatial dynamics of oil trading and production. Hedge funds are private investment pools that employ sophisticated trading techniques and invest on a collective basis for their clients. They are often founded in places such as New York and London that have continued to be the twin capitals in both energy trading and energy hedge funds and also other areas such as Houston, Calgary, Singapore and Switzerland that play second fiddle (Fusaro & Vasey 2006:31). This financialization of oil exposes the process of oil derivative trading to a global clout of investment and hedge funds and their speculative 107 trading. However, speculative activities on oil trading and production remain influenced by market movements and production of material oil which in turn affects the market prices of oil. The following section seeks to uncover, with regards to the 2008 oil spike, how speculative activities constitute the sociospatial dynamics of oil trading. I propose that the notion of “performativity” of oil derivatives, reinforces how the process of oil derivative trading, as delineated by price risk management and also speculative activities, remains enmeshed within the mutual adjustments and effects within oil trading and production as a whole. 6.3 The 2008 oil spike: The performativity of oil derivatives in the sociospatial dynamics of oil trading and production In the past three years, the IMF (2005) estimated that some US$100120 billion of new investments are in active and passive energy investment vehicles. The IMF further identified how hedge funds in arbitraging perceived inefficiencies in market prices do influence market outcomes and prices. Many similar reports, focusing on speculation and the financialization of oil, were generated in an attempt to document and explicate how oil prices had soared to a high of US$147 in July 2008. On this issue, the Saudi Oil Minister Ali al-Naimi alluded to how hedge funds, investment banks, program traders, and ordinary investors had been piling billions into oil futures, gas options, and complicated energy derivatives and therefore causing oil prices to skyrocket to US$147 per barrel in 2008 (Oil & Gas Journal 09/06/2008). 108 As explained in Chapter 4, benchmark prices for oil via Platts are assessed in relation to spot prices and prices of paper contracts such as swaps. Therefore, an increase in demand for paper contracts due to a higher volume of paper trading and speculative activities can cause prices of paper contracts to rise. This affects the overall benchmark prices that are widely used in pricing material oil and refined products. However, as much as it seems that “the paper tail wags the physical dog” (Trader F), changes in oil prices remain understood as driven by fundamental demand and supply. Making this argument, Christof Ruhl, BP‟s chief economist explained how financial speculators can 'accelerate or decelerate' oil prices, but they do not create underlying or future oil price trends (The Business Times 12/07/2008). Similarly, Al Troner, president of Asia-Pacific Energy Consulting, whom I had interviewed, noted that: Paper oil is an approximation of value, because eventually what will happen is that the number will be pushed around by physical demand and supply fundamentals. Paper is like an approximation of reality and through computer simulation, it gets better and better but not quite real… As much as paper oil reflects an approximated value of what real demand and supply of oil would be, speculations in paper oil do have real effects by “accelerating” oil prices upwards/downwards and affecting changes in price levels. In other words, although oil derivatives are deemed as “an approximation of reality”, the performativity of oil derivatives generate real effects and outcomes. Oil derivatives exist when performed. 109 MacKenzie (2006a; 2006b) proffered a possible classification of performativity of economics. “Generic” performativity of economics marks the weakest level of performativity that is used not just by academic economists, but in „real world‟. It is denoted by a wide variety of cases where ideas, theories, models, concepts, procedures and etc. that in some nonexclusive way partake in shaping reality. To this, oil derivatives can be understood as a concept where price risk of exposed material oil can be duly counteracted through a hedge via oil derivatives. As elucidated in previous chapters, the performativity of oil derivatives resides in the process of trading marked by various actors within the oil industry, namely oil traders. Within “generic” performativity, MacKenzie has identified “effective” performativity as the practical use of an aspect of economics that has an effect on economic processes. He further draws out two subsets from it: “Barnesian” performativity and counterperformativity (see Fig 6.1). For the utilization of oil derivatives to qualify as “effective” performativity, economic processes with concept being used must differ from processes without it being used. As highlighted by Trader B in Chapter 5.3, the lack of futures contract means that physical cargoes remain exposed to price risk without a means to minimize it. Hence, the notion of oil derivatives is understood to alter the way in which oil trading and production of material oil is carried out in conjunction with the management of price risk via hedging. This means that the performativity of oil derivatives does make a difference to and has real effects on the process of oil trading and production of material oil with and without it being performed. 110 Fig. 6.1 The performativity of economics: a possible classification (MaKenzie 2006b:17) More specifically, the intended notion for hedging and price risk management via oil derivatives as performed through oil derivative trading has „made a difference‟. This difference pertains to the way oil trading and production as a whole is able to minimize losses in buying or selling material oil that are exposed to price fluctuations in the market. When oil derivatives exude “Barnesian” performativity or counterperformativity requires in depth assessment (as did MacKenzie (2006a) on option theory via data and analysis on the historical development of the theory and case studies 111 on the effects of option theory) that indicates whether the concept conforms or moves away from the intended purpose. As the crux of this chapter is to reinforce how the process of oil derivative trading, delineated by price risk management and also speculative activities, remains enmeshed within the mutual adjustments and effects within oil trading and production as a whole, I propose that speculative activities can be understood to be reflective of the central aspects of counterperformativity. The intended purpose for hedging and price risk management via oil derivatives has taken a turn; speculative activities in seeking profit returns and value creation has led to marked increase in paper trades. According to various traders whom I have interviewed, the „excess‟ volume of paper oil as compared to material trades suggests that speculative activities are in place. However, upon deeper enquiry in whether it is possible to differentiate and to be certain that the „excess‟ volume of paper oil equates to speculative activities, Trader F stated that: ..it is not possible to pin point exactly what the paper oil is used for…yes, it is meant for risk management purposes (hedging). But what we see are numbers. Volumes of trades and corresponding prices. Everything is done through the same platforms or OTC. You can‟t tell the intentions behind the trades. Only the trader doing the trades would know. But in all certainty, oil prices do become more volatile with more players who speculate for profits. Coupled with the „opaqueness‟ of the OTC market and restricted data access on trade volumes and prices via organized exchanges, it is indeed difficult to ascertain the extent to which speculation has caused an increase in volume of paper oil trades and corresponding prices. However, the above quote does allude to how the intended concept of oil derivatives for price risk 112 management has met with greater volatility of the oil markets and prices due to the acts of speculation. This contradicts and opposes the intended purpose to minimize price risk (i.e. market price volatility) by amplifying price fluctuations. This has direct impacts on the price and also the trading and production of material oil. To MacKenzie (2006b:19), the notion of counterperformativity refers to how an aspect of economics is being used in „real world‟ processes, and the use is having effects, but among those effects is that economic processes are being altered in such a way that the empirical accuracy of the aspect of economics in question is undermined. In other words, the performance of oil derivative trading for speculative purposes reveals that practical action of oil derivatives can undermine the validity of its concept and purpose of price risk management. Various traders in the interviews felt that speculation is required in the oil markets but as highlighted by Trader G: “You speculate, you make some money… but theoretically speaking, paper oil is meant to manage risk of your physicals that are exposed to market price fluctuations…” In the previous section, speculative activities as per operations of investments funds and hedge funds are noted to embody distinct and separate socio-spatial negotiations from oil trading and production. However, actors in the economy are often engaged in a multiplicity of relations with other actors in different places, creating distinct network structures (Hess 2004). On a similar note, although investment banks, such as Deutsche Bank, located in oil trading and production nodes such as Singapore, are involved in risk management consulting and proprietary trading, they remain connected to 113 asset management firms and their speculative activities situated away from those locales (i.e. in Hong Kong) by trading oil derivatives on their behalf. These networked connections between actors and corresponding locales are embodied within the counterperformativity of oil derivatives. Furthermore, the performance of oil derivatives for speculative purposes is marked by: Let‟s say ok, you do paper…you can‟t be focusing on derivatives alone. It just doesn‟t work that way. The scoop on some hedge fund doing something in Hong Kong, some commodity fund just sprung up…some refinery is scheduled for maintenance in 3 months time…Things happening around the world, your region that you‟re in, where you are trading from… all good to know… more than welcomed. If you are really connected, you might just be a few phone calls and a few hours ahead to contemplate on your trades before the market closes… (Trader A) The knowledge on speculative activities and other useful information are essential in performing oil derivatives. More importantly, it is about how speculative activities are considered integral in the execution of trades and hence, part of the process of trading oil derivatives. Although speculative activities are deemed to have “adverse effects” on the intended purpose of price risk management, they remain integral to the process of oil trading and production as a whole by boosting liquidity in oil trading and even supporting production of material oil. All oil traders whom I interviewed have stressed the importance of liquidity in oil trading for competitive pricing and ensuring adequate volume of offers and bids so as to secure a good hedge. As commented by Trader I, there is no perfect hedge but having liquidity does help to give traders more options to manage price risk. According to Qatari Oil Minister Abdullah al-Attiyah, various upstream oil projects will be postponed or ceased to exist when oil prices plunged to below 114 US$60 per barrel in October 2008 from the record high of US$147 per barrel in July 2008 (Platts Oilgram News 29/10/2008). This points to how high oil prices, deemed to be caused by speculative activities, can in fact encourage production of material oil and in turn increase the supply of material oil and ease demand. With regards, to MacKenzie‟s concept of performativity of economics, I have sought to uncover how the speculative activities and risk management are founded on similar concept of oil derivatives and performed similarly through trading of oil derivatives. The trading of oil derivatives for price risk management is sustained by the needs of actors in the oil industry to hedge against price volatility in the markets. The counterperformativity of oil derivatives pertains that speculative activities do have “adverse effects” on the intended performativity of oil derivatives to minimize precisely the effects of price fluctuations (ie. price risk). Hence, the performativity of oil derivatives through a similar process and marked by various intentions and geographies that are embodied within it, yields different outcomes that affect each other. Speculative activities are thus part of the perforrmativity of oil derivatives and thus constitutive of the process of oil derivative trading and in turn, oil trading and production as a whole. 115 6.4 Concluding comments This chapter has elucidated how financialization of oil involves the development of investment funds and hedge funds that seek to yield profits from speculative trading. These speculative activities are executed in specific locations such as established financial nodes and locations with high concentrations of potential investors. With regards to the 2008 oil price spike, the increasing bouts of speculative activities have been noted as a distinct process that separates from the trading of oil derivatives for price risk management purposes. Addressing MacKenzie‟s (2006a; 2006b) concept of performativity of economics, I have shown how the performativity of oil derivatives are perpetuated by different actors and geographies involved in hedging against price risk for material oil and that of yielding monetary returns from speculative trading and activities. Though driven by different intentions, both price risk management and speculative activities remain „performed‟ through the similar process of oil derivative trading. More importantly, speculative activities, embodied through distinct geographies, remain fundamentally conjoined to and integral in their effects on and knowledge flows in the socio-spatial dynamics of oil trading and production. 116 CHAPTER SEVEN: SUMMARY AND CONCLUSION 7.1 Summary This thesis explores how finance in the global production network (GPN) of oil is spatialized and grounded within distinct socio-spatial relations and interactions. Although finance is acknowledged as an integral component in the production of commodities, it remains fundamentally understood as an underlying lubricant for commodity flows in providing credit loans and other financial services. The recent burgeoning geographical literature on finance has analyzed the impacts and spatiality of financialization on businesses and everyday life. In this thesis, I have suggested how financialization should be understood as a process whereby entities become integrated into the financial world. To expound the significance and impacts of finance on commodity production, my study has focused on assessing the process of oil derivative trading and its interdependence on the trading and production of material oil. The interdependence of these processes reveals how oil derivative trading is a critical process within and has considerable impacts on the trading and production of material oil. I have highlighted that this interdependence is not only enmeshed within power relations, embeddeness and value creation, but also fundamentally grounded within distinct spatialities. Chapter 4, as the first empirical chapter, provides a broad overview of the GPN of oil by highlighting the major geographies of oil production (i.e. refined oil products). Singapore is one such key location for oil production and is a regional hub for oil trading and oil pricing in Asia. I uncovered how network embeddedness founded within the information and knowledge 117 networks amongst actors such as oil traders and other related oil personnel are concentrated in Singapore. The role of Platts Singapore is assessed given its centrality in benchmark oil pricing for Asia. Indeed, the oil industry is dependent on Platts for generating the widely accepted benchmark prices used as a baseline in negotiating and settling oil trades. On the other hand, Platts, as per EKNs, has gained status and power to “regulating” oil trades in its MOC process due to acceptance and participation of actors in the oil industry. The Platts benchmark oil price assessment reveals how prices derived from the trading of paper oil are duly taken into consideration and hence oil derivative trading does ultimately affect real prices and also real demand and supply of oil. Chapter 5 uncovers the spatiality of oil derivative trading by first analyzing organized exchanges, specifically CME and ICE. These exchanges reflect “locational embeddedness” as there are prevalent nodes where derivative oil trading is executed. The operation of these organized exchanges is largely sustained by active actors such as IOCS and energy/oil supply and trading firms and also financial institutions who all trade mainly futures and options. These actors are in turn dependent on these organized exchanges due to the ease of electronic transactions for risk management and hedging purposes. However, the trading of oil derivatives remains largely negotiated through private bilateral contracts known as over-the-counter (OTC) transactions. As oil derivative trading via OTC contracts are negotiated between two counterparties, social networking and personal relationships are highly essential. Traders whom I interviewed have revealed how the spatial and relational proximities in establishing and maintaining these networks and 118 relationships are critical in gaining insights into demand-supply situations that would in turn affect their oil trading decisions and transactions. Singapore has thus become a prominent location in which oil derivative trading is established through the co-presence of oil traders and other related oil personnel and the proximity to regional clients and counterparties, especially in Southeast Asia. Since the economic downturn in 2008, there has been a significant increase in the utilization and reliance on exchange cleared OTC services to protect transactions from counterparty default. The advent and existence of exchanged-cleared OTC services, as seen in how Singapore Exchange‟s AsiaClear managed to establish itself during the economic downturn in 2008, is fundamentally supported by actors who utilize the services. Other than risk management and hedging purposes, oil derivative trading also creates value for actors within the oil industry through gaining cash profit by exploiting price differentials of oil. This notion of value creation provides liquidity in oil derivative trading as opportunities to earn profit returns have attracted the participation of investors and financial institutions outside of the oil industry. These investors and financial institutions are noted to cause oil price volatility and even oil spikes through their speculative activities and speculative trading. Chapter 6 begins by examining the geographies of the financialization of oil as per investment funds and hedge funds which are actively involved in speculative activities and speculative trading in order to gain cash profits. These investment funds and hedge funds are operated through financial nodes around the world, such 119 as New York, London, Singapore and Hong Kong, and also other locations with high concentration of potential investors. In the light of the recent 2008 oil price spike, the process of oil derivative trading, with respect to speculative activities has been noted as distinct from that of risk management purposes. Through MacKenzie‟s (2006a; 2006b) notion of performativity of economics, I proposed how speculative activities are inherently part of the performativity of oil derivatives. As such, speculative activities should be considered as constitutive of the socio-spatial dynamics of oil trading and production. In all, the trading of oil derivatives does not only provide risk management and hedging, but has also opened up the GPN of oil and oil prices to the wider socio-spatial negotiations of speculative financial activities. 7.2 Implications of Study and Future Research In exploring how finance is spatialized and grounded within the sociospatial relations and interactions of commodity production, the oil industry presents a dynamic and befitting case for research. The analysis that I have presented in this thesis is but a small perforation into the complexity and intersections of finance and the real world economy and society. During my fieldwork, I was told by various senior oil traders that it requires more than six years of experience in the industry to have a fuller grasp of the dynamics of the oil trading and production. Indeed, it is not the intention of this thesis or within my capacity for that matter to provide a full and comprehensive insight (if there is such an end) into the dynamics of oil trading and production. What I seek to examine is how and why actors and entities 120 become enmeshed into the networks of finance and how oil derivative trading is executed through specific spatialities and locations rather constituted through arbitrary virtual and electronic flows. I proposed how the GPN approach and its analytical capacity in explicating linkages, relationality and causal effects between actors can be effectively broadened to account for a wider spectrum of processes (i.e. finance) that are inherently linked to production. Although this may seem to burrow deeper into a “conceptual lock-in” of analyzing production geographies through networks (Reimer 2007), a network approach remains effective not only in engendering a more comprehensive understanding of production processes but also informs on the way in which finance, production economies and the interactions between them can be understood. This is a vital point of deliberation especially how the recent financial crisis has led to an economic crisis; although the geographies of the two crises may be different, “they will be determined by the mechanisms through which the former is transmitted to the latter…” (Garretsen et al. 2009:147). Indeed, both finance and the economy are deeply intertwined and the interactions between them necessarily generate distinct networks and spatialities. An analysis of the geographies of the interactions and interstices between finance and production would contribute in verifying and unveiling extent of the impact of finance on production economies and vice versa. As such, an examination of the intersections of finance and commodity production enables a deeper understanding of finance and production respectively and also the dynamics of the global economy. 121 Based on the tenets of the GPN and cultural political economy approaches, I have shown how, in my thesis, non-firm actors (i.e. oil traders) and institutions (i.e. Platts, CME and ICE) are prominent and key actors in affecting the dynamics of an industry. This analytical framework has maximized the research capacity of the GPN approach by extending studies beyond the socio-spatial negotiations of firms to the interactions and power relations between firms, non-firm actors and institutions. Broadly, my thesis has unpacked the power relations between actors (and institutions) and within information and knowledge networks are underscored by dynamic power relations between actors. For example, I have shown how the support by actors in trading via organized of CME and ICE has led to concretization of these organized exchanges while the lack of support has led to failed establishments of an organized exchange in Singapore, despite its vibrant oil trading and downstream production operations. Hence, this underscores how relationality between actors and institutions has an inherent causal power capable of producing concrete/spatial outcomes (Yeung 2005). In all, the GPN and cultural political economy approaches have been effective in addressing the intricate linkages between and power relations of actors within finance and production that are often established in personal networks and cultures. These approaches, in uncovering the dynamic interactions and power relations between firms, actors and institutions, can be extended to the analysis of numerous industries and economies, thus engendering a deeper understanding of the spatiality and why they are embodied in specific geographies. 122 The light treatment of the perforrmativity of economics (MacKenzie 2006a; 2006b) in Chapter 6 could have been further explored to understand the spatiality of the socio-historical development of oil derivatives as per economics such as theories, concepts and models. This is, however, a distinct research that requires the in depth understanding of models used in trading strategies, access to historical trade information from respective organized exchanges, clearing houses and even oil companies (i.e. IOCs and oil supply and trading firms) so as to account for both exchange-traded and OTC transactions. Furthermore, pre-derivative trading processes would perhaps require first- hand accounts from senior or retired traders so as to ascertain the effects of the perforrmativity of oil derivatives. I purport that a geographical assessment of the performativity of oil derivatives or economics by uncovering the spatiality of modern economic procedures, cultures and their effects on the economy, would further illuminate and explain the intricate linkages and negotiations present in finance and production, and the economy as a whole. An appreciation of interdependence between oil derivative trading and the trading and production of oil invokes lucidity on the inner workings and dynamics of oil trading and production that has been widely discussed since the 2008 oil price spike. Rather than deliberating whether it is either led by real demand and supply or speculation, this interdependence shows that both processes have the power and capacity to cause changes and fluctuations in oil prices. A geographical study of oil derivative trading and the trading and production of material oil highlights how and why these processes remain situated and concentrated in certain network structures and distinct locations. 123 I purport that this study and the notion of interdependence between the process of derivative trading and trading and production of material entities can be extended to incorporate other commodities that are traded in the commodity markets such as grains and oilseeds (i.e. wheat and corn), metals (i.e. tin and copper) and precious metals (i.e. gold and silver). Doing so opens up further and illuminates the dynamics within the nexus of finance and commodities, contributing to a more holistic and informed understanding of our modern economy. 7.3 Concluding comments As my thesis began with the highlights of the debates on the 2008 oil price spike, I shall now update its “aftermath”. As I write this concluding section of my research, oil prices continue to express volatility. In June 2009, the IEA reported how oil prices would be averaged about US$51 per barrel in 2009 and about US$58.90 per barrel in 2010 after the oil peaked at US$147 (Platts Oilgram News 30/06/2009). However, by October 2009, oil prices shot up to more than US$70 per barrel. The Executive Director of IEA, Nobuo Tanaka, expressed concerns with the sharp rise in crude prices and continuing volatility despite weak signs that the global economy is on the road to recovery (Platts Oilgram News 15/10/2009). Hence, as much as oil prices are supposedly reflective of real demand-supply dynamics, they continue to rise and hover at US$78 per barrel in December 2009 even in a lull of stable economic recovery projections. 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Websites (All accessed on 28/12/2009) CME Group Energy Sales Brochure http://www.cmegroup.com/trading/energy/files/CME-EN_SalesBrochure.pdf DBS Vickers http://www.dbsvickers.com/Pages/default.aspx Energy Information Administration (EIA) http://tonto.eia.doe.gov/energy_in_brief/world_oil_market.cfm IE Singapore Global Traders Programme (GTP) Brochure http://www.iesingapore.gov.sg/wps/wcm/connect/e46561004b6f52b5a266a6fa ddca57e9/GTP_brochure.pdf?MOD=AJPERES Invesco PowerShares Capital Management LLC http://www.invescopowershares.com/ Lyxor Asset Management http://www.lyxor.com/ Lyxor ETF http://www.lyxoretf.com/ Platts http://www.platts.com/ PowerShares DB Oil Fund http://dbfunds.db.com/dbo/index.aspx 160 SGX AsiaClear-Central counterparty clearing facility http://www.mas.gov.sg/about_us/annual_reports/annual20062007/39_gr owth2.htm SGX Press Release SGX ASIACLEAR® doubles volume of over-the-counter trades cleared in 2008 http://info.sgx.com/webnewscentre.nsf/7fdb25336d6fc55a48256dcf004a1e05/ 48256838002f07b14825729c001537ab?OpenDocument Shell Singapore http://www.shell.com/home/content/sgen/about_shell/shellinsingapore_10170901.html (accessed 1 Nov 2009) The ICE https://www.theice.com/about.jhtml UOB Kay Hian http://www.uobkayhian.com.sg/ News and Industry Reports Bloomberg News Goldman's Murti Says Oil `Likely' to Reach $150-$200 6 May 2008 (06/05/2008) BP Statistical Review 2009 http://www.bp.com/liveassets/bp_internet/globalbp/globalbp_uk_english/repor ts_and_publications/statistical_energy_review_2008/STAGING/local_assets/2 009_downloads/statistical_review_of_world_energy_full_report_2009.pdf CBS news 60 Minutes Speculation Affected Oil Price Swings More Than Supply And Demand http://www.cbsnews.com/stories/2009/01/08/60minutes/main4707770.shtml?s ource=RSSattr=60Minutes_4707770 Financial Times. Com Greenspan says 'good speculation' will cut the top off market peak 11 August 2008 (11/08/2008) http://www.ft.com/cms/s/0/823fc3a4-673a-11dd-808f 0000779fd18c.html?nclick_check=1 Financial Times.Com CFTC moves to curb commodity speculation 11 September 2008 (11/09/2008) http://www.ft.com/cms/s/0/25869288-8025-11dd-99a9-000077b07658.html IEA Medium Term Oil Market Report July 2008 http://omrpublic.iea.org/omrarchive/mtomr2008.pdf International Herald Tribune Functions of oil agency scrutinized; Inside The Markets 10 July 2008 (10/07/2008) 161 Oil & Gas Journal The Saudi view of Speculators Vol. 106(22) pp. 44 (09/06/2008) Platts Oilgram News Asia's need for oil could push price up to $150 10 June 2008 (10/06/2008) Platts Oilgram News UK to study role of speculation in recent crude oil price increase 7 July 2008 (07/07/2008) Platts Oilgram News OPEC, oil officials warn price fall to hit upstream projects 29 October 2008 (29/10/2008) Platts Oilgram News IEA sees oil averaging $51/b in 2009, $58.90/b in 2010 30 June 2009 (30/06/2009) Platts Oilgram News IEA „concerned‟ about rise in crude prices 15 October 2009 (15/10/2009) Platts Oilgram Price Report CFTC unveils new energy trading measures 30 May 2008 (30/05/2008) Platts Oilgram Price Report Debate on high oil prices moves to Madrid 1 July 2008 (01/07/2008) The Business Times (Singapore) Don't blame punters for oil prices: BP; Its chief economist says speculators don't create trends, they reflect them 12 July 2008 (12/07/2008) The Straits Times (Singapore) Oil price close to $120; New record high; some experts say price could hit US$200, others expect it to ease 29 April 2008 (29/04/2008) UNCTAD (United Nations Conference on Trade and Development) Secretariat (2009) Trade and Development Board Trade and Development Commission First session Geneva, 11–15 May 2009 Item 4 of the provisional agenda Energy-related issues from the trade and development perspective http://www.unctad.org/en/docs/cid2_en.pdf UNCTAD United Nations Conference on Trade and Development World Investment Report 2008 Transnational Corporations, and the Infrastructure Challenge http://www.unctad.org/en/docs/wir2008_en.pdf 162 APPENDIX I There are two types of financial markets for energy trading: exchange-traded market and the over-the-counter market (OTC):  The exchange-traded market (i.e. organized exchanges) is a centralized market where buyers and seller, through brokers, interact and trade financial energy products. The exchange provides a credit support mechanism to guarantee that each trade is executed and contract is settled.  The over-the-counter or OTC market is where buyers and sellers of energy products generally execute transactions with each other, either by phone or electronically, by individually negotiating customized contracts to meet each party‟s specific needs.  Oil derivatives: A futures contract is an agreement between two parties, a buyer and seller, for delivery of a particular quality and quantity of a commodity at a specified time, place and price. Futures can be used as a proxy for a transaction in the physical cash market before the actual transaction takes place.  Swap is a contractual agreement entered into between two counterparties, under which each agrees to make periodic payments to the other for an agreed period of time based upon a notional amount of volume. Swaps are financially or cash settled, as opposed to physically settled. This means the actual cash amounts are wired between accounts periodically, typically at month‟s end. No physical delivery of the commodity is required. Swaps are traded over the counter.  Option is a contractual agreement derived from the value of an underlying asset. An option gives its holder of the contract the right, but not the obligation, to buy or to sell the underlying asset on or before the contract expires at an agreed price (strike price). A call option gives the buyer of the option the right but not obligation to buy the underlying asset at the strike price. A put option gives the buyer the option the right but not the obligation to sell the underlying asset at the strike price. (Sources: Fusaro (1998), Fusaro & James (2005), Fusaro & Vasey (2006), Global Association of Risk Professionals 2008) 163 APPENDIX II  NYMEX: This was the world‟s largest physical commodity futures exchange and preeminent trading forum for energy and precious metals located in New York. Since late August 2008, NYMEX has been officially acquired by and part of the CME Group  CME: This is the world‟s largest futures exchange. It was first created on 12 July 2007 from the merger between the Chicago Mercantile Exchange (CME) and the Chicago Board of Trade (CBOT). Now, the CME Group is built on the merger and acquisition of Chicago Mercantile Exchange (CME), Chicago Board of Trade (CBOT) and New York Mercantile Exchange (NYMEX). CME serves the risk management needs of customers around the globe, providing the widest range of benchmark futures and options products available on any exchange, covering all major asset classes.  CME Globex: The supporting electronic trading platform for CME. This platform was the first global electronic trading system for futures and options and is now the world's premier marketplace for derivatives trading.  CME ClearPort: This was launched in 2002 to provide centralized clearing services and mitigate risk in the energy marketplace, specifically over-the-counter trades. Today, CME Clearport clears transactions across multiple asset classes around the world. CME ClearPort uses a central counterparty clearing model, where counterparty credit risk is shared among clearing members. This allows the central clearing house to guarantee the performance of every transaction- and the security of every clearing member‟s customer.  ICE: IntercontinentalExchange (ICE) was established in May 2000, with its founding shareholders representing some of the world's largest energy companies and global banks. ICE's mission was to transform OTC energy markets by providing an open, accessible, around-theclock electronic energy marketplace to a previously fragmented and opaque market. ICE offered the energy community price transparency, more efficiency, greater liquidity and lower costs than manual trading, such as voice or floor markets. Working together with participants in the energy markets, ICE developed the leading electronic marketplace for energy commodities, along with the leading electronic trade confirmation platform. ICE Data was launched in 2002 to meet the demand for increased market data in the OTC energy markets, and is today one of the leading providers globally. ICE has developed and 164 maintained its state-of-the-art technology infrastructure for trading, trade processing, clearing, market data and risk management, investing over $120 million in technology since inception. London-based International Petroleum Exchange (IPE) was acquired by ICE in June 2001.  ICE Clear: ICE's clearing operations is comprised of five regulated clearing houses across the U.S., Europe and Canada. Each provides risk management, capital efficiency and maximum financial safeguards, and offers security for global market participants in today's dynamic environment. ICE's clearing houses seek to provide users of ICE markets with robust central counterparty arrangements based on sound risk management frameworks; meet customer demand for an expanded range of cleared products facilitating growth together with secure risk management; work with the Futures Commission Merchant (FCM) community to ensure that ICE meets its evolving needs for risk management, operational excellence and service.  SGX AsiaClear: Singapore Exchange Limited (SGX), Asia-Pacific's first demutualised and integrated securities and derivatives exchange, launched SGX AsiaClear, its OTC Clearing Business and Facility for energy and freight derivatives, in May 2006. In response to Asia‟s overthe-counter (OTC) market needs, SGX AsiaClear offers a growing network of Asia-based counterparties to facilitate OTC trading and clearing activities, to enhance credit and risk management and to increase OTC operations and position-netting efficiencies. The SGX AsiaClear Facility, Asia‟s first and only OTC clearing platform, provides immediate 20-hour central counterparty clearing for OTC oil swaps and forward freight agreements. OTC market participants can conveniently use their OTC inter-dealer brokers to register trades electronically on the SGX AsiaClear Trade Registration System (TRS) for clearing and netting under accounts maintained with SGX OTC Clearing Members, many of which are international and bank-related institutions. (Sources: Fusaro (1998), http://www.cmegroup.com/,http://www.asiaclear.com.sg/about/aboutus.shtml, https://www.theice.com/ ) 165 [...]... geographies (Aalbers 2008, Langley 2008, Stockhammer 2008) In all, research on the geographies of finance emphasizes how finance remains constituted in different spaces and places despite the global flows of finance capital and virtualization of financial transactions Rather than analyzing solely on the basis of financial operations and transactions, research on financialization has established that... the socio-spatial negotiations of material oil trading, specifically in the light of Singapore‟s Platts benchmark prices that are influenced by both the trading of material oil and oil derivatives This chapter is followed by a critical analysis of the spatiality of oil derivative trading and its interdependence on the trading and production of material oil in Chapter 5 Speculative activities and their... influence on oil prices, though marked by distinct geographies, reveal a need to ground them more concretely in the socio-spatial dynamics of oil trading and production as a whole This analytical task is the main preoccupation of Chapter 6 Finally, Chapter 7 reviews and summarizes my geographical analysis of the dynamics of oil trading and production, evaluating the potential of economic geographical research... social networks, culture, technology, scientific knowledge and institutional contexts (v) Financialization The burgeoning research on financialization seeks to uncover the integration of firms and everyday life in finance The notion of financialization emanates from political economy and radical Marxian analyses of capitalism from the late 1960s to the 1980s Financialization was deemed as a permanent... location for the study of the socio-spatial negotiations of oil derivative trading, speculative activities and the trading and production of material oil3 1.2 A financial geographical perspective on oil trading and production On a broad level, this thesis seeks to contribute to the on- going academic perforations into the “black box of finance” (MacKenzie 2005) by understanding how finance is situated... effects of financialization through political and cultural economy approaches The significance of geography in understanding finance can be seen in the following four major areas of research: financial regulation, financial centre dynamics, performativity and sociality of finance, and financialization 14 (i) Regulation of finance The regulation of finance has been critically researched in view of declining... regulation of finance is, therefore, an interaction and intermeshing of governance and institutional spaces at various scales and matrices of power The complexity of spatialities and multi-scalarity of financial negotiations between actors and institutions in the global economy thus complicates the development and management of an effective regulatory system of global finance 16 (ii) Financial centres and. .. effects of finance on corporate management and everyday life, there remains more to be understood on why and how material assets are financialized and transformed into financial products or contracts Geographical research on commodities is predicated on analyzing commodity production of mainly agro-food and industrial commodities and also the process of commodification of natural resources and in environmental... that weave back and forth between actual and digital space within the complex virtual, social and institutional networks of finance (Sassen 1997; 2001; 2005) (iii) Performativity and sociality of finance Research on the performativity and sociality of finance transcends macro geographies and structural analyses by adopting a cultural economy approach in analyzing the performances, knowledge flows and. .. effects of both oil derivative trading and the trading and production of material oil I argue that speculative activities and their geographies, though distinct from those of price risk management, should be understood as part of the socio-spatial dynamics of oil trading 10 1.3 Organization of Thesis This chapter has provided a general overview of the research aims and directions of this thesis Chapter ... Fundamental demand-supply and the financialization of oil 1.2 A financial geographical perspective on oil trading and production 1.3 Organization of Thesis 11 CHAPTER TWO: GEOGRAPHY OF FINANCE AND. .. study of the socio-spatial negotiations of oil derivative trading, speculative activities and the trading and production of material oil3 1.2 A financial geographical perspective on oil trading and. .. dynamics of oil trading and production as a whole This analytical task is the main preoccupation of Chapter Finally, Chapter reviews and summarizes my geographical analysis of the dynamics of oil trading