The Real Stimulus: Low-Cost Natural Gas

Daniel Yergin in the WSJ: An unconventional oil and gas revolution is under way in the United States, but its full ramifications are only beginning to be understood. The basic facts are clear enough. Half a decade ago, it was assumed that the U.S. would become a large importer of liquefied natural gas; now the domestic natural gas market is oversupplied, thanks to the ability to produce shale gas through hydraulic fracturing and horizontal drilling technologies. Shale gas alone is now 10% of the overall U.S. energy supply. And similar technologies to recover so-called tight oil trapped in rock formations are largely responsible for boosting ...

Will Africa ever benefit from its natural resources?

BBC online debate: Whether Africa will ever benefit from its natural resources is a question that is more relevant now than ever, as new discoveries of coal, oil and gas across East Africa look set to transform global energy markets and - people hope - the economies of those countries.

Green Technologies and the Protracted End to the Age of Oil: A strategic analysis

New OxCarre paper by Niko Jaakkola: This paper considers competition between an oil exporter depleting
and selling an exhaustible resource, and an oil importer able to gradually lower the cost of substitutes. R&D into clean fuels begins before the substitutes are competitive, in order to reduce overall development
costs. The substitute constrains the oil exporter's market power: after an initial Hotelling-type stage, oil pricing becomes constrained by the ever-cheaper substitute technology. Supply is thus non-monotonic, initially falling, then forced up by competition from the substitute. Climate change slows down substitute development: rapid R&D forces the exporter to extract oil faster, aggravating near-term environmental impacts. If oil extraction becomes more expensive as supplies are depleted, the importer switches into clean fuels once these price oil out of the market; technological development will eventually be hastened to leave more of the oil locked underground. Novel numerical methods for solving PDEs are introduced into a differential game context.

Oil price risk, expropriation and bilateral investment treaties

New Vox column: The sharp increase in the oil price between 2003 and 2008 brought back the practice of expropriating assets of independent oil companies. This column suggests that bilateral investment treaties may mitigate expropriations and allow resource-rich countries to shift a larger proportion of the risk associated with variations in natural resource prices to oil companies.

The Canadian resource economy

CHRISTOPHER MAJKA blogs: ... our country is blessed with energy resources, minerals, forests, arable land, and fisheries. This richness of natural resources should and does not constrain the developmental vision of Canada, for instance, counter to any expectation or intuition, the Canadian based Cirque du Soleil has become one of the world's foremost exemplars of nouveau cirque, almost single-handedly transforming the fast-vanishing circus tradition from a fading and tawdry showcase to a leading vehicle for the imaginative performing arts -- who would have imagined it? Properly employed natural resources can not only be an enormous asset, but can also pave the way for a robust, diverse, and resilient Canadian economy.

Oil price risks and pump price adjustments

New World Bank WP: Between 1999 and 2008, world oil prices more than quadrupled in real terms. For oil importers, vulnerability to oil price increases, defined as the share of gross domestic product spent on net oil imports, rose considerably. Considering medians, low-income countries had the highest vulnerability in 2008 and the highest increase in vulnerability between 1999 and 2008. When changes in vulnerability were decomposed into several contributing factors, more than two-thirds of 170 countries studied were found to have offset the increase in the value of oil consumption by reducing the oil intensity of gross domestic product. Oil intensity fell in more than half the countries in every income group and in every region of the world, driven by falling energy intensity and, to a lesser extent, the oil share of energy. This study also examines the degree of pass-through to consumers of increases in world prices of gasoline, diesel, kerosene, and liquefied petroleum gas between January 2009 and January 2012, when oil prices in nominal U.S. dollars more than doubled. Retail fuel prices varied by two orders of magnitude in 2012, and oil-exporting countries were far less likely to pass on price increases. Gasoline had the highest pass-through, followed by diesel, liquefied petroleum gas, and kerosene. The median pass-through increased with income for gasoline, diesel, and kerosene, but was highest in low-income countries for liquefied petroleum gas. Despite divergent pricing policies, the pass-through coefficients of different fuels were strongly positively correlated, suggesting that the degrees to which domestic prices tracked world prices were comparable for the four fuels in many countries.

Political risk insurance as an instrument to reduce oil and gas investment risk and manage investment returns

J World Energy Law and Business: New oil and gas supply projects are increasingly taking place in non-OECD countries, where the rule of law and the sanctity of contracts are often not as well developed as in OECD countries. The oil and gas industry faces increasing political risk at the same time that oil prices have become more volatile and project costs have escalated, sometimes squeezing margins. The exceptionally high capital intensity of the oil and gas industry makes companies particularly vulnerable to political risk. MIGA, the Multilateral Investment Guarantee Agency of the World Bank, in its World Investment and Political Risk 2011 report, broadly defines political risk as ‘the probability of disruption of the operations of companies by political forces and events, whether they occur in host countries or result from changes in the international environment. In host countries, political risk is largely determined by uncertainty over the actions not only of governments and political institutions, but also of minority groups and separatist movements’. The essence of this definition focuses on the risks arising from the adverse actions—or inactions—of governments. Political risk includes, for example, currency convertibility and transfer restrictions, expropriation, civil unrest, war and terrorism, breach of contract and non-honouring of sovereign financial obligations. Energy investors are understandably concerned that returns on projects in emerging markets could suffer as a result of political changes or instability in the host country. In 2010, a survey of the US Energy Industry conducted by the Aon Corporation, a leading global provider of risk management services, insurance and reinsurance brokerage, ranked political risk among the top five challenges facing the industry. The survey also revealed that most companies are not properly prepared to assess and mitigate political risk. Political risk insurance (PRI) is a relatively recent innovation in positioning companies to reduce oil and gas investment risk. This article explores how PRI can be used to mitigate risks in the oil and gas sector when conducting business across borders, thus helping to manage investment returns. The article discusses a comprehensive case study of the Chad–Cameroon Petroleum Development and Pipeline Project to highlight the various facets of political risk and how these can be mitigated.

The most important commodity after oil

The Economist: The trade in iron ore makes it the second-largest commodity market by value after crude oil. Some 2 billion tonnes of the stuff will be dug up in 2012. The price swings of the past few months say plenty about the world economy, as well as the febrile state of global commodity markets. Between June and September spot prices for iron ore fell from around $140 a tonne to close to $85, a three-year low, way off a record high of over $190 a tonne set in February 2011. Prices have recovered a bit since, settling at around $100 a tonne. Had the oil price undergone similar upheavals it would have provoked endless discussion.

Energy-Saving Technical Change

New NBER WP: We estimate an aggregate production function with constant elasticity of substitution between energy and a capital/labor composite using U.S. data. The implied measure of energy-saving technical change appears to respond strongly to the oil-price shocks in the 1970s and has a negative medium-run correlation with capital/labor-saving technical change. Our findings are suggestive of a model of directed technical change, with low short-run substitutability between energy and capital/labor but significant substitutability over longer periods through technical change. We construct such a model, calibrate it based on the historical data, and use it to discuss possibilities for the future.

The Beijing-Baghdad oil axis

FT: After a decade investing in Africa, China is quietly turning to Iraq to secure future supplies of oil.

Corruption and competition for resources

New NHH WP: An increasing share of world FDI is carried out by multinationals from developing countries. These investors may have objectives and constraints that differ from their developed country counterparts. In this paper we focus on differences in attitudes to corruption, and how these may shape the competition for the right to extract resources in a developing country context. We show how differences in the investors’ level of technology and differences in the host country government's trade-off between bribes and taxes determine who wins the competition for the resource and the winning price. We find that the entry of a corrupt investor may induce the honest investor to offer bribes instead of taxes. Surprisingly, however, our analysis also demonstrates that under some conditions, the entry of a corrupt investor may in fact induce the honest investor to increase its tax payments.

The 9 Habits of Highly Effective Resource Economies

A new CIC report: Canada’s resource peers offer lessons that too often are overlooked in our domestic debate, which is narrow, partisan, frequently uninformed, and almost entirely focused on the Alberta oilsands. “We’ve been handed the golden goose and we squabble over it,” says John Hancock, a counsellor at the World Trade Organization.

Petro Rents and Hidden Wealth: Evidence from Bank Deposits in Tax Havens

New mimeo by four Scandinavians:  Who benefits from natural resource rents? Work on the resource curse suggests that such rents fail to reach broader populations in resource rich countries, but where, then, do rents go? We study the transformation of rents from oil and gas extraction into hidden personal wealth using a unique dataset on bank deposits in tax havens. We find that a dollar increase in oil and gas rents in autocracies increases the value of bank deposits in tax havens by around 2 percent while there is no such effect for democracies. Elections and political conflict also increase the hidden wealth of autocracies notably when they are rich in oil and gas. The results suggest that at least 8 percent of petroleum rents are converted into personal political rents in countries with poor political institutions.

Extractive Growth in the United Arab Emirates

Acemoglu and Robinson: In the last blog post we showed how from 1928 until the 1960s despite the ever increasing flow of oil, the Al-Nahyan family, in the shape of Sheik Shakhbut bin Sultan Al-Nahyan, kept the country resolutely underdeveloped... a major program of economic modernization and infrastructure building, the remarkable results of which you can see today in Abu Dhabi.... ...this sort of growth will ultimately become unsustainable — growth in Abu Dhabi and in the Emirates cannot continue unless the political institutions become more inclusive...

IEA predicts boom for Iraq’s oil industry

Financial Times:  Iraq’s oil output is to more than double by the end of the decade and by the 2030s it will be the world’s second-largest oil exporter after Saudi Arabia, according to an in-depth study by the International Energy Agency... Decades of conflict and international sanctions wreaked havoc on the Iraqi oil industry but the past few years have seen a renaissance. Baghdad has signed contracts with a number of international oil companies such as BP and Royal Dutch Shell to raise production at some of its largest oilfields...

IMF - OxCarre Conference: Call for papers

The Research Department of the International Monetary Fund and OxCarre
International Conference
'Understanding International Commodity Price Fluctuations'
March 13-14, 2013
IMF Headquarters, Washington DC

This conference seeks draft papers or detailed proposals for theoretical and empirical papers analyzing fluctuations in international commodity prices. Topics might involve:

• Historical developments in international commodity markets
• Price co-movements between various commodities
• The global financial crisis and international commodity markets
• Consequences of commodity prices on unemployment and economic activity in commodity exporting countries
• Reactions of commodity exporters to the changing structure of global commodity markets
• Inventories and commodity prices
• The consequences of rising demand from China and India on commodity market developments
• The financialisation of commodity markets and the role of information in commodity markets 

The Journal of International Money and Finance (JIMF) will publish a Special Issue on Understanding International Commodity Price Fluctuations with a selection of the papers presented at the conference.The guest editors invite detailed proposals and preferably draft research papers.

Proposals should be submitted electronically to Mr. Hites Ahir at HAhir@imf.org and Ms. Celia Kingham at celia.kingham@economics.ox.ac.uk no later than November 9, 2012. The guest editors will make the final selection of papers to be included in the Conference. Authors will be notified by November 18, 2012 if their paper has been selected.

For more information please click here.

The Natural-Resource Curse Strikes Again

Andres Velasco writes at Project Syndicate:  Chile today produces one-third of the world’s lithium – used in batteries that power everything from computers to cars – and has great potential to expand that share. But, while everyone agrees that Chile should realize its potential as a global supplier of lithium, the local debate on how to accomplish this has produced more heat than light. President Sebastián Piñera’s government has attempted to auction off the right to expand lithium production to up to 100,000 tons over the next 20 years. But, as is often the case with natural-resource exploitation in developing countries – though not necessarily in Chile – the process has turned into a tragicomedy of errors, impeding the country’s development. There are lessons in this experience for other natural-resource exporters...

ht: Dany Jaimovich

Russia faces end of petrodollar surplus

Financial Times: Russia’s petrodollar surplus, which has buffered the economy from external shocks for more than a decade, is poised to vanish as early as 2015 as import revenues overtake those from oil exports, according to its central bank.

Political Economy of Natural Resource Richness

Rabah Arezki at Columbia Law School: In seeking to prevent negative fallout from resource development efforts, Arezki listed the following suggestions:

• Diversification of resources, production, and revenue-streams away from the natural resource sector, so that natural resources essentially become a smaller piece of a nation’s total “pie;” in this sense, non-resource sector revenue may be used as a hedge against macroeconomic volatility;
• Transfer of / movement away from natural resource wealth/capital to human and physical capital; and
• Employment of frameworks to guide optimal spending on resource development as well as resource use; such frameworks should seek to anchor public spending and smooth consumption.

Oil Wealth in Central Africa

New IMF volume: Despite its vast oil wealth, central Africa still struggles to sustain strong, inclusive economic growth or to generate sufficient employment opportunities, particularly for its fast-growing youth population. Drawing on new research, Oil Wealth in Central Africa, edited by Bernardin Akitoby and Sharmini Coorey, lays out the macroeconomic and growth challenges facing the region; examines oil wealth management and its implications for poverty reduction; and includes four case studies that exemplify lessons learned.
It includes a chapter on managing oil windfalls by van der Ploeg.

Mining in Indonesia and Mozambique’s riches

The Economist:

On Mozambique:

HEAVY mechanical diggers chomp away at the earth in the sweltering heat of northern Mozambique’s Tete province. Beneath the brittle terrain lie vast deposits of coal, which Vale, a Brazilian mining giant, is busy digging out while tankers spray water to tame clouds of dust. Managers reckon the mine will produce 4.6m or so tonnes of coal this year. In a few years it hopes to raise that to 22m. Rio Tinto, another mining firm operating in Tete, says the region is home to the world’s best undeveloped coking coal...

and on Indonesia:

THE idea was simple. Use a London listing to bring British corporate-governance standards to an Indonesian mining firm set to profit from feeding China’s vast appetite for coal...

How Mongolia Learned From Chile on Managing a Mineral-Rich Economy

A World Bank blog: The Chile-Mongolia dialogue paved the way for a series of landmark reforms from UlaanBaatar - including law-based structural budget balance rules, ceilings on net public debt and on yearly increases of public expenditures, the creation of a Fiscal Stability Fund to be invested overseas and diminish Dutch Disease risks, a Public Procurement Law, a revamp of the social welfare system that laid the ground for a more efficient and cost-effective social protection, and others. Implementation will certainly have its challenges, as legislative steps are only the beginning. But Chile's example has shown that moving along such a path may lead Mongolia to extract the largest bang from their natural-resource buck.

Link to full Policy Note.

Resource Wars and Confiscation Risk

New OxCarre paper by van der Ploeg: Resource wars can be modeled with two-way regime switch uncertainty and contest success functions. Fighting is more intense if the political system is less cohesive, fighting technology is well developed, oil reserves are high and the wage is low. More government stability intensifies resource wars, but leads to less voracious oil depletion. Oil extraction is more aggressive in the presence of contested resources, but less so with more government stability. Our model of resource wars builds on a model of confiscation risk and of perennial political cycles. Not confiscation, but risk of confiscation matters for efficiency. Before confiscation, oil reserves are depleted too rapid. Risk of confiscation is associated with a hold-up problem, which depresses exploration investment and exacerbates the inefficiencies. A subsidy can correct for this. If there is a chance that the economy flips back to no confiscation outcomes are less distorting.

Handbook of Land and Water Grabs in Africa

New volume. Topics include: The history of land grabs and the contradictions of development... Chinese engagement in African agriculture... The global food crisis and the Gulf’s quest for Africa’s agricultural potential... The political economy of land and water grabs... Will peak oil cause a rush for land in Africa?... How to govern the global rush for land and water? ...

Government Revenue Stabilization Funds — Do They Make Us Better Off?

New WP from Alberta: Alberta government resource revenues are highly volatile. Adjustment of government  pending to shifts in revenues imposes social and economic costs. To limit the impact of revenue volatility, many jurisdictions have established revenue stabilization funds. There is little empirical evidence on whether these funds improve welfare or whether some fund designs increase welfare by more than others. We provide a quantitative welfare comparison of several different types of rule-based government resource revenue stabilization funds using data for Alberta. Our results show that, relative to the historical path of expenditures, some stabilization funds would have increased welfare. The best performing fund from a welfare perspective requires 50 percent of natural resource revenues to be deposited in the fund each year, and 25 percent of the assets withdrawn. This fund cuts expenditure volatility by almost 30 percent. Stabilization funds that accumulate large asset stocks and, thus, generate low levels of current government services, generally yield low welfare. Funds that depend on an equally-weighted moving average of past revenues have the worst welfare performance of the funds considered. While this study employs data for Alberta, the results are relevant to other resource producing jurisdictions with volatile revenues.