Thursday, August 30, 2012

The Violence of Petrodollar Regimes

A new book by Luis Martinez:
The creation of oil "rents" in the 1970s put Algeria, Iraq, and Libya on the fast track to modernization. Massive revenues turned Algeria into the "Mediterranean dragon," Libya into an "emirate," and Iraq into the preeminent "rising military power" of the Arab world. From a political perspective, the progressive socialism of these countries would seem to have engendered profound, promising change: increased rights for women, positive urbanization, and improved education. Yet oil wealth's realities are beyond disillusioning. The international community now wonders whether reform can ever penetrate such nations and if the west will ever enjoy a secure gas supply. Offering the first global evaluation of these issues, Luis Martinez considers the nature of oil-sponsored violence in Algeria, Iraq, and Libya and its ability both to weaken and bolster their regimes.

Wednesday, August 29, 2012

Recent developments in oil markets

James Hamilton writes on Econbrowser

What's behind the rise in the price of Brent? Some financial reports have stressed rising tensions with Iran. However, one objective, if imperfect, quantitative measure of that comes from the market price of Intrade's contract for an imminent attack on Iran. This has moved relatively little since April.

Another reason may be that total world oil production (including natural gas liquids and biofuels) has been stagnant since January, though at a level 3-1/2 million barrels/day higher than during the Libyan cutbacks in 2011, and 2 mb/d above the pre-Libyan peak in January 2011.

I believe that the most important factor driving oil prices recently has been changing assessments of how strong the world economy will perform over the next 6 months. The decline in oil prices in April-June and the subsequent rebound is mirrored in stock indexes like the S&P500. A stronger economy should mean both higher corporate profits and higher demand for oil. Markets are apparently betting that favorable economic trends in places like the U.S. and China are enough to outweigh the discouraging numbers coming out of Europe.

Tuesday, August 28, 2012

The dynamic effects of resource dependence on institutional quality

Recent World Bank working paper
Are natural resources cursed? An investigation of the dynamic effects of resource dependence on institutional quality

This paper examines whether natural resource dependence has a negative influence on various indicators of institutional quality when controlling for the potential effects of other geographic, economic and cultural initial conditions. Analysis of a panel of countries from 1996 to 2010 indicates that a high degree of resource dependence, measured as the share of mineral fuel exports in a country's total exports, is associated with worse government effectiveness, as well as with reduced levels of competition across the economy. Furthermore, estimation of long-run elasticities suggests that government effectiveness and the intensity of domestic competition decrease over time as the dependence on natural resources increases. An illustration of the Russian case shows that the negative effects accumulate in the long run, leading to a worse deterioration of government effectiveness in Russia than in Canada, a country with a comparable resource endowment but far better overall institutional quality. This result is corroborated by a significant negative correlation found between regional resource dependence and an indicator of regulatory capture in Russian regions, which indicates that the regulatory environment is more likely to be subverted in regions that are more dependent on extractive industries. Overall, the findings would be consistent with a situation in which a generally weak institutional environment would allow resource interests to wield the bidding power accruing from export revenues to subvert the content of laws and regulations, as well as their enforcement. The fact that this is associated with negative externalities for the rest of the economy, notably by undermining a level playing field across non-resource sectors, sheds light on a potential channel for the resource curse.

Monday, August 27, 2012

South Africa's mines

A strike that turned deadly highlights a slew of economic problems that are made worse by government rhetoric. Read The Economist's analyisis here.

Thursday, August 23, 2012

Managing Oil Price Volatility: Bringing Latin America’s Lessons to the Pacific

It is well understood that climate change poses specific dangers for small island developing states. Less commented on is another threat: the vulnerability of these states to the repercussions of energy insecurity.
Read more on the World Bank blog.

Tuesday, August 21, 2012

US to clarify rules on oil, mining payments abroad

(Reuters) - Two years of uncertainty for big US-listed mining and energy companies will end on Wednesday (22 August 2012) when US regulators finalize new rules on overseas operations, one set that will require the disclosure of payments to foreign governments while the other seeks to halt the flow of so-called "conflict minerals."
Read more here.

Monday, August 20, 2012

Norway’s nest egg

Oslo’s oil fund is seen as a paragon of responsible use of energy income but debate rages about its strategy. 
Read more from the FT's recent analysis here.

Friday, August 17, 2012

Diversification in Resource-Dependent Countries

Economic diversification is vital to countries' long-term economic growth, but many resource-rich nations fail to expand their sources of income beyond oil, gas and mining.
Economies heavily dependent on natural resources can face serious challenges in sustaining growth because of swings in prices for those resources. The need for diverse sources of income goes beyond fluctuating prices. Being rich in natural resources can hurt macroeconomic stability, crowd out domestic industry such as the manufacturing sector, increase the likelihood of civil unrest and undermine democratic institutions.
Read more of this report by Revenue Watch.

Thursday, August 16, 2012

How not to manage a boom

QUICK: which country is the world’s third-biggest producer of oil? The answer (this is the Lexington column, after all) is the United States.
Read more of Lexington's column in this week's Economist.

Wednesday, August 15, 2012

From Resource Curse to Blessing

Joe Stiglitz writes on Project Syndicate:
New discoveries of natural resources in several African countries – including Ghana, Uganda, Tanzania, and Mozambique – raise an important question: Will these windfalls be a blessing that brings prosperity and hope, or a political and economic curse, as has been the case in so many countries? 
Read it all here.

Tuesday, August 14, 2012

Breakthrough Renewables and the Green Paradox

New OxCarre paper by Rick van der Ploeg:
We show how a monopolistic owner of oil reserves responds to a carbon-free substitute becoming available at some uncertain point in the future if demand is isoelastic and variable extraction costs are zero but upfront exploration investment costs have to be made. Not the arrival of this substitute matters for efficiency, but the uncertainty about the timing of this substitute coming on stream. Before the carbon-free substitute comes on stream, oil reserves are depleted too rapidly; as soon as the substitute has arrived, the oil depletion rate drops and the oil price jumps up by a discrete amount. Subsidizing green R&D to speed up the introduction of breakthrough renewables leads to more rapid oil extraction before the breakthrough, but more oil is left in situ as exploration investment will be lower. The latter offsets the Green Paradox.