Diffusion as an Explanation of Oil Nationalization

Abstract

Following Rogers, diffusion is defined as a process of social communication involving information flows under uncertainty. The international petroleum industry is a complex social system with considerable uncertainty about existing structural conditions, particularly from the point of view of a developing country. The “demonstration effect” of oil production nationalizations has been an important source of information about the balance of country-company power. The Mexican (1938) and Iranian (1951) nationalizations inhibited further takeovers by demonstrating that the companies had the power to discipline nationalizing countries by isolating them from international markets. The North African nationalizations of 1971 were disinhibiting as they demonstrated that underlying structural conditions had changed to the point where industry sanctions were no longer effective. The diffusion hypothesis is tested empirically and shown to be consistent with the data.