Captive markets and climate change: revisiting Edith Penrose's analysis of the international oil firms in the era of climate change

Edith Penrose’s analysis of the investments of the international oil companies (IOCs) stemmed from her interest in the economics of the large international firm and its implications for developing economies. Her approach highlights the endogenous factors shaping the growth of the large firm and cautions against viewing it as a neutral technocracy where investment automatically responds to price incentives. Drawing on Penrose’s concept of a captive market in oil products, this research develops Penrose’s ideas around motive, profit, self-financing and the international firm to explain why the IOC’s institutional environment still favours investment in fossil fuels. The study collected country and firm level data on investment and production in downstream petrochemical refining. The data show a connection between the captive market and the strategies of the large oil firms in expanding refining capacity as a strategic hedge against regulatory policies to limit climate change. This locks society into a carbon intensive infrastructure, reduces the motivation for investment and adds to global CO₂ emissions. The findings indicate that the oil companies need to take greater risks on green investments with their retained earnings. Governments need to direct this investment towards socially useful purposes using coordinated regulatory pressure.