Tuesday, March 31, 2015

Hamilton on Alberta Oil sands given lower oil prices.

Over at the Econbrowser blog James Hamilton reflect on the Alberta oil sands response to declining oil prices. It appears that oil production from the Tar sands are not scaled back as quickly as other unconventional productions, such as tight gas, because the capital investment is much larger, so production will continue as long as the marginal costs are below the spot price.
Price cannot exceed long-run marginal cost in equilibrium. But at least in the case of oil sands, it could take a long, long time to reach that equilibrium.
Nevertheless, a government that had been banking on substantial revenues from taxes and royalties will be in for a downfall as well.

The Economist on Nigerian Oil Curse

This week's Economist highlights [economist.com] the corruption infested state of the Nigerian oil production at the eve of the new elections. It's well known there is rampant stealing ongoing, and the article gives some some examples of them, and their causes. While anyone who might pose a threat to those that benefit is quickly shoved aside, as happened with the Central Bank governor Lamido Sanusi (also reported at this blog [here]), who was asking where $20B had gone.

A new presidency would do well to start reforming the oil sector for the benefit of the entire country.

At the moment of writing the counting of votes are still ongoing, with some reports [ft.com, and nytimes.com] noting that the opponent, Muhammadu Buhari, a former military ruler, is at the advantage. He has stated at several occasions (reported here [allafrica.com] and here [ibtimes.com] for instance) that weeding out corruption in the oil sector would be one of his priorities.

The Economist ends its article with a wish from a local of the Niger delta, that the oil was never found as it destroyed their livelihoods.

Monday, March 30, 2015

Shift from Coal to Gas? Not too quick please, says BHP Billiton Chief

The CEO of BHP Billiton, Andrew Mackenzie, takes issue [ft.com] with vocal natural gas producers who claim that gas should replace coal in energy production as fast as possible as a bridge to an economy based on lower CO2 emission.
I think there is a marketing ploy, which is ‘give up coal and burn more gas.’ (...) I am not against the trend, but come on — the last time I looked there was plenty of carbon in methane and there is huge amounts of carbon in oil, and the carbon emissions from transport are just as much a problem as the carbon emissions from coal-fired power stations.
Personally, I've noted especially the aggressive ad campaign of Statoil, claiming that gas is the energy of the immediate future until renewable energies can take over.

So what's his favoured solution? So he actually doesn't disagree with the shift to gas, even if it's a "marketing ploy", as long as it'll be slow. In the mean time, carbon capture and storage (CCS) should be developed. CCS is currently not a very popular strategy in the mix of CO2 reductions, partly due to costs, which may go down once further research and pilot programs are executed. The time required to develop the technology further will probably be measured in decades.

So that's where I'm not fully understanding the claim. On the one hand, coal producers state that pressure to "close coal[oxcarre.blogspot.com] "a very western, rich country solution" [ft.com], given that it's a cheap and abundant source of energy for developing countries.
McKenzie stated in an earlier interview, “I don’t think the answer is to keep it [coal] in the ground because energy prices will just shoot up.” [ft.com]
However, if he then then argues that there should be a global carbon price and investments in one of the most expensive CO2 reducing options, then doesn't this inevitably increases the price?

Monday, March 23, 2015

UK Budget: North sea oil industry tax reductions. Anything green to compensate?

After requests from the UK oil and gas industry to reduce production levies and increase investment support, discussed earlier [oxcarre.blogspot.com], the UK Budget for the next few years includes sizeable reductions in taxes for the industry (see also The Economist [economist.com] of this week). There is not much about cutting carbon however.

A simple sum of multi-year measures makes a £1345M reduction in taxes for the Oil industry (Budget here, p. 68, account 11-14, all years to 2020, £275M for this year only). Add to that £1125M on decreases on fuel duties (account 8). Against that I found £340M of tax increases on company cars in 2020 (account  37), which I suppose is not really a green consideration, and £40M of tax increases on energy and water efficient technology through capital allowance from 2016 onwards (account 40; Yes an increase, it has the opposite sign from the tax reductions of oil industry, so it should count as more tax, or less subsidy).

Besides the oil industry in Scotland, another example is the story [BBC.co.uk] of businesses located in Wales that are being compensated for the high energy prices. "It is understood 16 firms including Tata Steel in Port Talbot qualify in Wales, sharing some £240M compensation." Interestingly, it is reported that the head of Tata Steel in Europe made this request directly, because "'heavy industries in the UK were burdened with environmental obligations that pushed up their energy bills, sometimes to levels 50% higher than their European competitors.'" The last part is weird, because for households the energy price difference between UK and continental Europe is the other way around as far as I remember. To push the argument, "[chemical and metal-based] companies employed nearly half a million people in the UK and accounted for 30% of total exports and imports."

The main thing highlighted by the government on sustainable energy is opening of negotiations on a £1000M Swansea Tidal Lagoon energy project [bbc.com], but part of this £1B is financed by private sector and individuals (SWL website), but it's unclear how much.*  So that puts things in perspective.

* Apparently the government has to guarantee a sales price, much like it did with the Nuclear plant in Somerset, decided earlier this year (strike price ~£90/MWh for 35 years). The Telegraph [telegraph.co.uk] put it at "tens of millions" in subsidy. Why? The guaranteed price is £168 per MegaWattHour (MWh) for 35 years. £168 is 4 times current price (so the government puts up the difference between spot and guarantee), the capacity is 500GWh/year. I get to ~£60M annual subsidy ( (168-168/4)*500.000 ). Over 35 years, with energy prices assumed increasing 2% year (so making the subsidy decline) and a 5% discount rate, a ~£1B subsidy Net Present Value (actually £948.6B). So the key figure: if the government was suppose to spend it's subsidy the coming fiscal year it would amount to £63M additional subsidy counted for a green energy measure.

Saturday, March 21, 2015

at VoxEU: Plummeting oil prices, depreciating oil currencies? Not so simple

VoxEU features a post [voxeu.org] by Sascha B├╝tzer, Maurizio Michael Habib and Livio Stracca on the effect of oil price changes on currencies, finding some unexpected results:

The large dip in oil prices reverberated across asset markets, contributing to the depreciation of the Russian rouble. This column argues that the recent fall of the rouble may be more an exception than the norm. Oil shocks have only a limited impact on global exchange rate configurations, since oil exporters tend to lean against exchange rate pressures by running down or accumulating foreign exchange reserves.

There is a paper underlying it, here [europa.eu].

Friday, March 20, 2015

Cochrane's comment on Arezki et al. "Giant Oil Discoveries"

John Cochrane posted a nice comment [blogspot.co.uk] on the paper that Rabah Arezki presented last term at OxCARRE's seminar series, "News Shocks in Open Economies: Evidence from Giant Oil Discoveries" (co-authored with Valerie A. Ramey and Liugang Sheng). See here [blogspot.co.uk] for our original post. Currently also an OxCARRE working paper [ox.ac.uk], here [pdf, ox.ac.uk]

Wednesday, March 18, 2015

The Guardian's "Keep it in the ground" campaign

As part of his final months as editor of the Guardian, Alan Rusbridger [guardian.co.uk] has started a climate campaign called "keep it in the ground" [guardian.co.uk]. In short, if we take the 2 degree Celsius limit seriously, we can still burn 575 Gigatons of carbon while the currently proven reserves of oil gas and coal contain 2795 Gigatons (see opening letter of him).

This relates to the idea of unburnable assets which we posted about last year, here  [oxcarre.blogspot.com], and of which also a related paper exist from Paul Collier and Tony Venables (Closing Coal: Economic and Moral Incentives [oxcarre.ox.ac.uk], and blog [oxcarre.blogspot.com]).

Today's Guardian frontpage has the UK Energy Secretary Ed Davies supporting [guardian.co.uk] the campaign, but this we already knew [oxcarre.blogspot.com].

Tuesday, March 17, 2015

New Research: On the relationship between resource funds, governance and institutions

New research from Stella Tsani (repec), of the The Centre for Euro-Asian Studies, University of Reading,

On the relationship between resource funds, governance and institutions: Evidence from quantile regression analysis

This paper uses quantile regression estimation techniques so as to investigate the relationship between resource funds, governance and institutional quality by paying special attention to the distribution of the latter. The estimation results indicate that resource funds are associated with better governance and institutions. The positive correlation is identified for the entire distribution of governance and institutional quality variables indicating that resource-rich countries can benefit from the establishment of resource funds, irrespective of whether they are found at the lower or at the upper end of the ranking of governance and institutional performance. The results offer evidence in support of the view that resource funds are valid tools of insulation against the “resource curse” as manifested through governance and institutional quality deterioration. Resource funds may support policy making and strengthen governance and institutional formations not only in countries with good governance and institutions but also in countries which lag behind in the latter.
Paper published in Resources Policy [sciencedirect.com], it follows up on an earlier paper [sciencedirect.com] of her also published in Resources Policy.

Monday, March 16, 2015

New Research: Blocking the Pathway Out of the Resource Curse

A new working paper by Anar K. Ahmadov [ox.ac.uk], on

Blocking the pathway out of the resource curse: What hinders diversification in resource-rich developing countries?
This essay assesses the impact of geographic factors, trade openness and political institutions on one of the key possible avenues for addressing the “resource curse”: export diversification. It does so with refined data spanning 1960-2010 and in a single framework that uses instrumental variables approach to tackle endogeneity, omitted variable bias and measurement error issues that characterize many studies of the resource curse. The results show that natural resource-rich developing countries are less likely to achieve export diversity the more autocratic institutions they have, particularly weak executive constraints and low legislative effectiveness; the weaker the rule of law; if they are located in the Middle East or Africa; if they are landlocked or mountainous; and the richer they are in oil, but not in other resources. On the other hand, the quality of government and competitiveness of political participation do not predict export concentration. There is also little evidence to support the view that trade integration, trade policy and tariff rates matter for export concentration in this set of countries. While neither colonial experiences under British or French rule, nor having legal systems designed under English Common Law or French Commercial Code have significant effects, resource-rich developing countries with past socialist institutions are significantly more likely to have more concentrated exports. Population size, ethnic or religious fractionalization, and human capital do not seem to affect the diversity of exports. Finally, unlike oil wealth, abundance in non-fuel minerals, coal, and forest resources is associated with higher export diversity.
Available here [globaleconomicgovernance.org]

FT Special report on Azerbaijan

Since our visit to Baku [oxcarre.blogspot.com] a few weeks ago, we gained additional interests in the developments in Azerbaijan. Today, the Financial Times issued a Special Report on the country. available here [FT.com], with the main tag line:
Reform offers the best hope for national stability

Wednesday, March 11, 2015

OxCARRE seminar: Getting Incentives Right: Human Capital Accumulation and Natural Resource Booms

Today, OxCARRE's Gerhard Toews will present on

Getting Incentives Right: Human Capital Accumulation and Natural Resource Booms

Abstract (from Februari 2014 version)
One of the major factors restricting demand for education in developing economies is limited employment opportunities for educated labour force on the local job market. Thus, removing this obstacle should become a crucial factor contributing to the accumulation of human capital. We offer an empirical test for this proposition, looking at the consequences of resource boom for demand for education in Kazakhstan in 2001-2005, using a unique dataset of the Household Budget Survey. The oil boom provides us with the necessary exogenous variation to establish the causality. We show that in resource-rich regions of Kazakhstan resource boom increases the likelihood for the households to pay tuition fees and the probability of employment in the formal sector for educated labour force. We are able to refute the conjecture that our effect is driven merely by growing income of the households (Engel curve effect). Thus, in addition, our paper also provides insights as to whether private demand for education can compensate the known deficits of public provision of education in resource-rich countries.
Working paper available here [eea-esem.com]

Tuesday, March 10, 2015

OxCARRE Seminar: The Grey Paradox: How fossil-fuels owners can benefit from carbon taxation

Today's OxCARRE's seminar has Renaud Coulomb from LSE (website) speaking on

The Grey Paradox: How fossil-fuels owners can benefit from carbon taxation

This paper studies the distributional impacts of optimal carbon taxation on fossil-fuels owners. We show that optimal carbon taxation can increase the profits of owners of a carbonemitting exhaustible resource. Such phenomenon contrasts with claims from fossil-fuels owners –especially from OPEC member countries– that carbon taxation will undermine their profits. We build a theoretical model of resource extraction where a polluting exhaustible resource competes with a dirtier abundant resource and a clean backstop. The atmospheric CO2 concentration has to be kept under a carbon ceiling and the optimal extraction path is decentralized by a carbon tax. As the carbon ceiling is tightened, the exhaustible-resource rent, and thus profits, is partly captured by the tax levier (the “capture effect”), but the dirtier resource is made less competitive (the “competition effect”). We determine conditions under which profits increase as the ceiling falls. The role of resource endowments, pollution contents, extraction costs and demand elasticity is analyzed. Calibrating the model for the transportation sector, we find that limiting cumulative new emissions in this sector between 322.7 and 637.5 GtCO2 increases profits of conventional-oil owners.
Working paper available here 

FT: Algerian protests against fracking

The FT reports [FT.com] on protests that have erupted in the south of Algeria against fracking plans of the government. Residents fear that the chemicals used for the procedure will pollute the scarce water resources available in the region that borders the Sahara desert.

The government states that it should develop all resources for the economic benefit of the country. However,
"Ms Touni, the protest leader, said perceived corruption and anger about how the government distributes resources from Algeria’s vast energy resources had contributed to doubts about the project."

Thursday, March 5, 2015