Ethnic inclusion in resource-rich states in West Africa

New Zurich WP: This working paper argues that power sharing amongst ethnic groups is crucial for the political management of resource wealth in Africa. As ethnic conflicts often result from a struggle over access to the state and its material benefits, power sharing should decrease the conflict risk in resource-rich countries. The paper tests this argument in a quantitative analysis of West Africa, based on a new dataset on natural resource wealth. The results show that ethnic power sharing indeed significantly decreases the risk of ethnic conflict onset. Moreover, it mediates the conflict-fuelling effect of resource production: Only where relevant ethnic groups are excluded does resource wealth lead to conflict. However, the analysis also indicates that for ethnic power sharing to be effective it needs to include all relevant ethnic groups in a country.

Does the Oil Price Adjust Optimally to Oil Field Discoveries?

New ETH WP by Leinert: The Hotelling rule argues that the price for a non-renewable resource adjusts to the shadow value of the resource, reflecting its remaining availability. This study provides an empirical test of this hypothesis. It investigates whether the price of crude oil does adjust to unexpected news about oil field discoveries. The observed price reaction is compared with a prediction of the price decline as derived from
the Hotelling model. This study finds evidence for an adjustment of the price to news about greater resource availability: the price of crude oil declines on average by 0.88% on discovery days. The degree of adjustment to the new level of scarcity is not found to differ significantly from the social optimum. Thus, there is evidence
for the existence of a shadow cost component - a necessary pre-requisite for the Hotelling rule to hold.

Do Oil Prices Respond to Real Interest Rates?

New paper in Energy Economics: We show that the robustness of an inverse relationship between the real interest rate and real oil price depends crucially on how the real interest rate is calculated, and the time-frame of the sample. Consistent with earlier studies, we find that the oil price falls with an unexpected rise in either U.S. or international ex-ante real interest rates. When the ex-post real interest rate is used, the oil price only falls with rises to short-term rates (three months or less). Additionally,the response of the oil price to long-term ex-ante real interest rates must include the period through the mid-2000s for the inverse relationship to appear. In contrast, the oil price consistently falls with unexpected rises in short-term real interest rates throughout the entire sample. We draw two conclusions from the results. The first is that the oil price is consistently responsive to short-term U.S. and international real interest rates, underlying the importance of storage. Second, oil prices have become more responsive to long-term real interest rates over time.

The Political Economy of Government Revenues in Post-Conflict Resource-Rich Africa

New NBER WP: This paper examines the post-war strategies of Liberia and Sierra Leone to generate revenues from their natural resources. We document the challenges faced by the government of the two countries, contrasting measures taken to address these challenges as well as the outcomes. We complement the analysis with an analytical model which explores the implications of exploiting natural resources in the aftermath of a civil conflict before public management institutions are developed, as observed in Liberia and Sierra Leone. The key lesson is that resource-rich countries emerging from conflict face a difficult trade-off between relatively large longer-term gains which accrue when institutional capacity is developed prior to exploiting the resources, and smaller short-term revenues that come with immediate exploitation of the resources. The findings call attention to the potential role of the international community in developing post-conflict countries’ natural resource and revenue institutional capacity, as well as transparent corporate and government institutions for resource management.

WB Report Warns of Dramatically Warmer World

Like summer’s satellite image of the melting Greenland ice sheet, a new report suggests time may be running out to temper the rising risks of climate change. "Turn Down the Heat: Why a 4°C Warmer World Must be Avoided," warns we’re on track for a 4°C warmer world marked by extreme heat-waves, declining global food stocks, loss of ecosystems and biodiversity, and life-threatening sea level rise.

Highlights:

• New World Bank-commissioned report warns the world is on track to a “4°C world” marked by extreme heat-waves and life-threatening sea level rise.
• Adverse effects of global warming are “tilted against many of the world's poorest regions” and likely to undermine development efforts and goals.
• Bank eyes increased support for adaptation, mitigation, inclusive green growth and climate-smart development.

The Resource Curse and its Potential Reversal

New Uppsala University WP:  Several recent papers suggest that the negative association between natural resource intensity and economic growth can be reversed if institutional quality is high enough. We try to understand this result in more detail by decomposing the resource measure, using alternative measures of both resources and institutions, and by studying different time periods. While an institutional reversal is present in many specifications, only ores and metals interacted with the ICRG measure of institutional quality consistently have a negative growth effect but a positive interaction that turns the curse around when institutions are good enough.

Violence and resources in Kenya

The Economist interviews John Githongo:

Baobab (The Economist's Africa blog) : Recently we’ve seen outbreaks of violence around the country, including the massacres of villagers around Tana River in the east and the slaughter of police recruits in Samburu county in the north. So far an estimated 500 people have been killed...

John Githongo: What we are seeing now is localized violence, the result of a struggle for power that comes from the competition for resources due to an increasing amount of international and local elite interest in our newfound oil, natural gas, gold, as well as our fertile land. All those things combined means that the politicians are still using violence as a political tool... What’s happening is that there is a massive land grab underway... Now, there’s oil. There’s gold. There’s gas. There’s pasture. And when you combine that with devolution and international investment—the stakes rise higher and higher. The political intensity increases, and that’s why in these regions the violence has just exploded...

Where Is All the Coal?

Slate: Coal is America’s mighty rock. Because coal burns at a slow rate for a long time, it’s more efficient as an energy source than other fossil fuels. And the United States is naturally well-endowed with coal resources—25 percent of the world’s coal reserves are within our borders. Coal has been the leading electricity source worldwide, and over the past 10 years it has supplied one-half of the increase in global energy demand, growing even faster than renewables. And now it’s one of the most fiercely disputed fuels.

There is a dark side to coal. It produces more carbon dioxide when burned than other fossil fuels do and adds disproportionately to global climate change. Ecological costs are abundant, too, and range from mountain-top removal mining to air pollution to coal ash spills...

The Natural Gas Myth

Slate: There’s a pernicious argument being made against energy efficiency, and it goes like this. Last winter was one of the warmest on record, so people had to spend less to heat their homes and businesses. That, combined with a “drilling binge ” in shale gas and new production, made for record low natural gas in prices in April, at less than $2 per million British thermal units (MMBtu). This phenomenon has boosted the U.S. economy to the tune of more than$ 100 billion annually, by one estimate. With such low prices, the thinking goes, investments in alternative energy and energy efficiency don’t make sense...

The economics of global climate leadership

The Economist: THE International Energy Agency has released its latest World Energy Outlook. The most sobering piece of information in it is a recurring highlight: the estimated time at which the world is "locked in" to a rise in global temperatures of at least 2 degrees Celsius. By 2017, existing energy infrastructure will be sufficient to generate such a scenario; for the world to halt warming at that 2-degree level, it would need to ensure that all additional energy infrastructure was zero carbon or begin retiring existing infrastructure before the end of its useful economic life. Both strategies are difficult to contemplate, and 2017 is not very far away at all.

But the big story in the 2012 outlook is the change in the demand for and supply of energy. Unsurprisingly, emerging markets, and Asia especially, account for ever more of the world's energy demand. Somewhat surprisingly, new exploration and technology—mostly the technique for obtaining unconventional oil and gas known as hydraulic fracturing, or "fracking"—will make America a net exporter of energy within a few decades. Patterns of energy trade will shift significantly as a result...

US set to become biggest oil producer

FT: The US will overtake Saudi Arabia and Russia to become the world’s largest global oil producer by 2017, according to the International Energy Agency, in one of the clearest signs yet of how the shale revolution is redrawing the global energy landscape...

Carbon Markets: Past, Present, and Future

New NBER WP: Carbon markets are substantial and they are expanding. There are many lessons from experiences over the past eight years: fewer free allowances, better management of market-sensitive information, and a recognition that trading systems require adjustments that have consequences for market participants and market confidence. Moreover, the emerging international architecture features separate emissions trading systems serving distinct jurisdictions. These programs are complemented by a variety of other types of policies alongside the carbon markets. This sits in sharp contrast to the integrated global trading architecture envisioned 15 years ago by the designers of the Kyoto Protocol and raises a suite of new questions. In this new architecture, jurisdictions with emissions trading have to decide how, whether, and when to link with one another, and policymakers overseeing carbon markets must confront how to measure the comparability of efforts among markets as well as relative to a variety of other policy approaches.

Oil exporters’ dilemma

New VoxEU column by Cherif and Hasanov: Policymakers in many commodity-exporting countries confront the question of how much to consume, save, and invest out of revenues from commodity exports. This column says policy should focus on improving productivity in the tradeable sector and reducing volatility through diversifying this sector. This would lower precautionary saving needs, increase investment, raise consumption, and improve welfare.

The Economist on oil in Brazil, Canada, and the US

The perils of Petrobras: BRAZIL’S discovery of oodles of offshore oil in 2007 felt like a transformative moment. For Petrobras, the state-controlled oil company, it raised the prospect of pumping 5m barrels a day by 2020, up from around 2m—meaning a windfall for the government and juicy returns for minority investors. Under Graça Foster (pictured), Petrobras’s boss since February, the find may yet prove a boon to both. But they and she face a white-knuckle ride first...
The sands of grime: THE oil town of Fort McMurray gets a bad press. GQ magazine portrayed it as a hellhole of testosterone and tattoos, where drunken oilworkers shower strippers with cash and get into fights because there’s nothing else to do. Esquire called it “the little Canadian town that might just destroy the world”...

America’s oil bonanza: THE shale-gas revolution in America has been as sudden and startling as a supertanker performing a handbrake turn. A country that once fretted about its dependence on Middle Eastern fossil fuels is now on the verge of self-sufficiency in natural gas. And the news keeps getting better. This week the International Energy Agency (IEA) predicted that the United States would become the world’s largest oil producer by 2020, outstripping Saudi Arabia and Russia...

The Changing Relationship Between Commodity Prices and Equity Prices in Commodity Exporting Countries

New paper by Rossi: We explore the linkage between equity and commodity markets, focusing in particular on its evolution over time. We document that a country’s equity market value has significant out-of-sample predictive ability for the future global commodity price index for several primary commodity-exporting countries. The out-of-sample predictive ability of the equity market appears around 2000s. The results are robust to using several control variables as well as firm-level equity data. Finally, our results indicate that exchange rates are a better predictor of commodity prices than equity markets, especially at very short horizons.

From Exxon to BP: Has Some Number Become Better than No Number?

New JEP article: On March 23, 1989, the Exxon Valdez ran aground in Alaska’s Prince William Sound and released over 250,000 barrels of crude oil, resulting in 1300 miles of oiled shoreline, the deaths of 250,000 birds, 2800 otters, over 250 seals, and destruction of nearly uncountable salmon and herring eggs (for details, see http://www.evostc.state.ak.us/facts/index.cfm). This event and its aftermath, graphically illustrated to television viewers around the world, ignited debate about the environmental risks of oil usage, the adequacy of regulatory oversight, and the appropriate compensation for damages suffered. The Exxon spill also ignited a debate within the economics profession concerning the adequacy of methods to value public goods, particularly when the good in question has limited direct use, such as the pristine natural environment  of the spill region...

How will oil affect Madagascar's environmental riches?

BBC News: The rising prices of oil on world markets, coupled with new technologies aim to turn the Indian Ocean island - famous for its unique habitat and wildlife - into a significant oil producer...

Fueling Growth when Oil Peaks

New CESIFO paper by Andre and Smulders: While fossil energy dependency has declined and energy supply has grown in the postwar world economy, future resource scarcity could cast its shadow on world economic growth soon if energy markets are forward looking. We develop an endogenous growth model that reconciles the current aggregate trends in energy use and productivity growth with the intertemporal dynamics of forward looking resource markets. Combining scarcity-rent driven energy supply (in the spirit of Hotelling) with profit-driven Directed Technical Change (in the spirit of Romer/Acemoglu), we generate transitional dynamics that can be qualitatively calibrated to current trends. The long-run properties of the model are studied to examine whether current trends are sustainable. We highlight the role of extraction costs in mining.

Monetary Rules for Commodity Traders

New IMF mimeo by Catao and Chang: We develop a dynamic model of a small open economy that trades commodities whose world prices are subject to realistic random fluctuations, and study the implications of
monetary policy alternatives. The model is much more flexible than those of previous studies, especially in allowing to compare perfect risk sharing against financial autarky. In each case we show how to derive analytically optimal Ramsey allocations and flexible price allocations, and hence to examine the crucial role of behavioral elasticities, production structure, and capital mobility in determining the welfare properties of different monetary choices. Applying these insights to a calibrated example, we find that the impulse responses associated with PPI targeting track flexible price allocations closely, but can diverge greatly from the Ramsey allocations, especially when risk sharing is perfect and the elasticity of demand for exports of a home aggregate is high. In those cases, policies that stabilize the real exchange rate more than PPI targeting, such as targeting expected inflation, deliver higher welfare. But PPI targeting is the clear winner under portfolio autarky.

The Role of Technological Change in Green Growth

New NBER paper by Popp: By reducing the costs of environmental protection, technological change is important for promoting green growth. This entails both the creation of new technologies and more widespread deployment of existing green technologies. This paper reviews the literature on environmentally friendly technological change, with a focus on lessons relevant to developing countries. I begin with a discussion of data available for measuring the various steps of technological change. I continue with a discussion of sources of environmental innovation. Given that most innovation is concentrated in a few rich countries, this leads to a discussion of the remaining role for lower-income countries, followed by a discussion of technology transfer. Because of the importance of market failures, I then discuss the role of both technology policy and environmental policy for promoting environmentally friendly technological change. The review concludes with a discussion of what environmental economists can learn from other fields.

Mining, Pollution and Agricultural Productivity in Ghana

New paper by Arag on and Rudz: Most modern mines in the developing world are located in rural areas, where agriculture is the main source of livelihood. This creates the potential of negative spillovers to farmers through competition for key inputs (such as land and labor) and environmental pollution. To explore this issue, we examine the case of gold mining in Ghana. Through the estimation of an agricultural production function using household level data, we find that mining has reduced agricultural productivity by almost 40%. This result is driven by polluting mines, not by input availability. Additionally, we find that the mining activity is associated with an increase in poverty, child malnutrition and respiratory diseases. A simple cost-benefit analysis shows that the actual fiscal contribution of mining would not have been enough to compensate affected populations.

The Causes and Consequences of the Saudi Crude Discount

New paper by Peck: Between 1991 and 2003, Saudi Aramco sold its crude to U.S. refineries at a substantial discount relative to Asian refineries at a total cost of approximately 8.5 billion USD. Using variation in discount receipts across refineries over time, I find that the discount rents were entirely captured by refiners as profits and were not passed through to consumers in the form of lower retail gasoline prices.
There is also evidence that the discount policy affected refiners’ political action. In particular, I find that discount receipts are associated with an increase in refiners’ overall political donations, and that other types of profit shocks were not associated with changes in political giving. This suggests that the effect of the discount was not simply a consequence of the increase in refining profits. Finally, I show that the discount resulted in a reallocation of contributions toward members of congressional committees that reviewed bills of interest to Saudi Arabia and away from those who received donations from pro-Israel interest groups.

International Commodity Prices and Political Unrest in Latin America

New paper by Maldonado: Latin America is a region characterized by a turbulent political history and a marked dependence on commodity exports. Constructing a new panel dataset covering most of the 20th century, I examine how international prices for Latin America’s principal exports influenced political unrest. I document a significant association between prices and subsequent political unrest. The results suggest that political dissidents behave rationally, choosing from a menu of protest activities. Specifically, higher export prices are associated with a lower likelihood of violent protest and a higher probability of peaceful demonstration, consistent with higher opportunity cost discouraging dissidents from undertaking riskier protest activities. This pattern is especially true for the price of commodities which produce diffuse rents which are less easily extracted by the state.

Nigeria's oil

The Economist: IN AUGUST Nigeria announced that oil production had reached a record 2.7m barrels a day but few experts believed it. Oil is also being stolen at a record rate and traders’ figures show output at well below the government’s figures. Information about Africa’s biggest oil industry is an opaque myriad of numbers. No one knows which ones are accurate; no one knows how much oil Nigeria actually produces. If there were an authoritative figure, the truly horrifying scope of corruption would be exposed...

Why Oil-Rich States are So Violent

New mimeo by Blair: I develop a theory of whether and where civil wars emerge in resource-rich states, based on bargaining within the state over the spoils and on the state's attempts to safeguard the resources. I argue that these processes are shaped by where the resource is discovered. In contrast to existing scholarship which describes oil wars over territorial control of natural resources, I predict that regional economic and security inequalities lead only to conflict in resource-poor regions. To test the theory, I present a new dataset of the timing and location of oil and natural gas discoveries and a novel causal identification strategy. I find that civil war is more likely in states with oil discoveries, but only if it is found on land where local populations can threaten to interrupt production. In stark contrast to scholarly and practitioner consensus, I find that these civil wars take place not in the oil region itself, but elsewhere in the state.

Zambia’s Mineral Tax Reforms

New ICTD paper: The recent rise in commodity prices is one feature that has influenced reforms in mineral
industries around the world. While the general determinants are becoming better understood, each country may offer new insights into this problem. This paper focuses on Zambia‟s experience to understand what determined the tax reforms there. In addition, it explores the successes and failures of the mechanisms used to ensure a stable investment environment in Zambia. The paper finds that contract clauses between mining companies and the Zambian government provided some stability, even if no arbitration has so far occurred. In addition, certain tax structures imposed so far have not provided any protection. This paper suggests a better enabling environment, including greater diversification and government administrative capacity, may make these strategies more successful in the future.

Green growth

New World Bank paper by Withagen and Smulders: This paper reviews dynamic general equilibrium models
in order to collect insights on the interaction between economic growth and environmental issues. The authors discuss the Ramsey model and extend it for natural resource inputs and pollution, as well as for endogenous technical change. Green growth becomes within reach if there is good substitution, a clean backstop technology, a small share of natural resources in gross domestic product, and/or green directed technical change.

Oil and political survival

New JDE article by Andersen and Aslaksen: Political economy theories on the “natural resource curse” predict that natural resource wealth is a determining factor for the length of time political leaderships remain in office. Whether resource wealth leads to longer or shorter durations in political office depends on the political incentives created by the natural resources, which in turn depend on the types of institutions and natural resource. Exploiting a sample of more than 600 political leadership durations in up to 152 countries, we find that both institutions and resource types matter for the effect that natural resource wealth has on political survival: (i) wealth derived from natural resources affects political survival in intermediate and autocratic, but not in democratic, polities; and (ii) while oil and non-lootable diamonds are associated with positive effects on the duration in political office, minerals are associated with negative duration effects.