Friday, October 30, 2015

New OxCARRE Research: Left in the Dark? Oil and Rural Poverty

OxCARRE's Sam Wills [] and Brock Smith [] brought a new research paper,

Left in the Dark? Oil and Rural Poverty

Oil booms do not benefit the rural poor. To show this we combine data on night-time lights and population at a very fine (1 km2) resolution to construct global measures of rural poverty from 2000-2013. We find that oil booms, due either to high prices or new discoveries, increase GDP per capita. However, the increase in output is limited to cities and towns, and does not benefit the rural poor. We also find that while urbanization is occurring throughout the developing world, it is not being hastened by oil wealth.
Available here [, pdf].

Thursday, October 29, 2015

New Research: Economic effects of shocks to oil supply and demand

James Hamilton [] gives a nice overview on his own blog [] of a new research paper [, pdf] with Christiane Baumeister [] wherein they use a previously developed bayesian estimation method for VAR models on oil supply and demand shocks. The method allows for a generalisation and flexible adaptation of Killian (2009, AER []) and following articles.

Structural Interpretation of Vector Autoregressions with Incomplete Identification: Revisiting the Role of Oil Supply and Demand Shocks

Traditional approaches to structural interpretation of vector autoregressions can be viewed as special cases of Bayesian inference arising from very strong prior beliefs about certain aspects of the model. These traditional methods can be generalized with a less restrictive Bayesian formulation that allows the researcher to summarize uncertainty coming not just from the data but also uncertainty about the model itself. We use this approach to revisit the role of shocks to oil supply and demand and conclude that oil price increases that result from supply shocks lead to a reduction in economic activity after a significant lag, whereas price increases that result from increases in oil consumption demand do not have a significant effect on economic activity.

Tuesday, October 27, 2015

New Research: Oil and Gas Revenue Allocation to Local Governments in Eight [US] States

A new working paper/report is available from NBER, Richard G. Newell [] and Daniel Raimi [] both Duke University.

Oil and Gas Revenue Allocation to Local Governments in Eight States.


This report examines how oil and gas production generates revenue for local governments in eight states through four key mechanisms: (i) state taxes or fees on oil and gas production; (ii) local property taxes on oil and gas property; (iii) leasing of state-owned land; and (iv) leasing of federally-owned land. To compare across states, we show the percentage of total revenue generated by oil and gas production that flows to local governments from these revenue sources. We also connect these calculations to related research to assess whether state and local policies are providing sufficient revenue for local governments to manage increased costs associated with shale development. We find that in most cases, existing policies appear to provide adequate revenue for local governments to manage increased costs associated with growing oil and gas activity. As of 2014, revenues fall short of the costs imposed on local governments in some highly rural regions experiencing rapid, large-scale development, notably the Bakken region of North Dakota and Montana, select counties in Texas, and select local governments in Colorado and Wyoming. Collaboration between industry and local governments, especially on road repairs, could reduce public costs.

Available here []. 

Monday, October 26, 2015

Sovereign Wealth Funds in the New Era of Oil

OxCARRE associate Rabah Arezki and colleagues Adnan Mazarei, and Ananthakrishnan Prasad from the IMF, and also available on the IMFDirect blog here, write on

Sovereign Wealth Funds in the New Era of Oil

By Rabah Arezki, Adnan Mazarei, and Ananthakrishnan Prasad 

As a result of the oil price plunge, the major oil-exporting countries are facing budget deficits for the first time in years. The growth in the assets of their sovereign wealth funds, which were rising at a rapid rate until recently, is now slowing; some have started drawing on their buffers.

In the short run, this phenomenon is not cause for alarm. Most oil exporters have enough buffers to withstand a temporary drop in oil prices. But what will happen if low oil prices persist, and how will policymakers react?

We explore here the fallout from low oil prices on sovereign wealth funds in oil-exporting countries and find that that they have important domestic implications. The impact on global asset prices will depend on the extent to which the unwinding of oil exporters’ sovereign wealth funds is not compensated by portfolio adjustment in other parts of the world.

The rise of sovereign wealth funds

In the early 2000s, high oil prices brought about a massive redistribution of income to oil exporters, resulting in current account surpluses and a rapid buildup of foreign assets. Governments established new sovereign wealth funds or increased the size of existing ones to help manage the larger pool of financial assets.

The total assets of sovereign wealth funds are concentrated in a few countries. As of March 2015, it is estimated at $7.3 trillion, of which $4.2 trillion are oil and gas related. While there are large differences across sovereign wealth funds, available information on their asset allocation points to a significant share in equities and bonds. 

Oil prices and the redistribution of global income

With high oil prices throughout the 2000s, the aggregate current account balance of exporters reached about $630 billion in 2011, exceeding that of emerging Asia combined. The current account surpluses of oil exporters are vanishing in 2015, however, and it is unlikely that this decline will reverse soon. On current projections, their combined current account balances could recover to about $200 billion in 2020.

In contrast to the 2000s, the recent oil price drop has been driven mainly by supply factors  that may lead to a decoupling of the paths of asset accumulation between these two groups of sovereign wealth funds. The rate of asset accumulation by sovereign wealth funds in emerging Asia—mostly oil importers—is likely to rise but it will likely decline for the funds in oil-exporting countries. Of course, much will depend upon the strategic asset allocation choices made by the largest sovereign wealth funds in the low oil price environment.

Impact on global asset markets

The overall impact of the fall in oil prices on asset prices will depend on whether oil importers have a lower marginal propensity to save than oil exporters. The fall in oil prices tends to transfer wealth from oil exporters to high-saving emerging Asian countries—but also to many other countries, including large advanced economies, some of which have a low propensity to save. From a global perspective, this implies lower global saving and higher interest rates. 

Precisely how much the savings of the sovereign funds of oil producers decline depends, of course, on changes in their fiscal and external current account balances. Sovereign wealth funds’ market operations will also depend on how much their governments opt to borrow or draw on their fiscal buffers, including those kept with sovereign wealth funds. Saudi Arabia issued its first sovereign bonds since 2007 to local banks to finance its fiscal deficit.

In addition, oil-exporters’ sovereign wealth funds are significant holders of U.S. treasury debt and private equity. Our back-of-the-envelope calculations show that, prior to the oil price decline, countries of the Gulf Cooperation Council (GCC) alone were projected to have a combined fiscal surplus of about $100 billion in 2015 and of about $200 billion between 2015 and 2020, but are now likely to reach a combined deficit of $145 billion in 2015 and over $750 billion in 2015-20. This implies change in net assets available to sovereign wealth funds in the GCC alone of $250 billion in 2015 and $950 billion in 2015-20.

Considering the expected tightening in U.S. monetary policy—especially against the background of concerns about market liquidity, increasing risk aversion, and falling reserve holdings by some emerging markets—a substantial change in the path of asset accumulation by sovereign wealth funds will likely have a direct effect on financial markets.

A study by economists at the Federal Reserve has shown that if foreign official inflows into U.S. Treasuries were to decrease in a given month by $100 billion, five-year Treasury rates would rise by about 40 to 60 basis points in the short-run, with a long-run effect of about 20 basis points.

Domestic implications

What does all this mean for the accumulation of sovereign wealth in oil-exporting countries, at least in the medium term?

The low price environment is likely to test the relationship between governments in oil-exporting countries and their sovereign wealth funds. Absent cuts in public expenditures, governments will likely be transferring less revenue than before to these funds. At the same time, pressures to draw down on sovereign wealth funds’ assets will probably rise.
Among Middle East oil exporters, only the United Arab Emirates, Qatar, and Kuwait’s fiscal buffers will last for over 25 years on current fiscal plans and oil price projections, according to our estimates. Bahrain and Yemen will exhaust them in the next two years, while most other countries will run out of buffers in four to seven years.

Even though they’ll still be able to borrow to finance their spending, governments of these oil-exporting countries would probably do well to tighten their belts if they hope to achieve the dual objective of sharing oil wealth equitably with future generations and economic stabilization.

EITI progress and countries' back-pedalling.

The Economist highlights this week the progress of the Extractive Industries Transparency Initiative (EITI), to bring transparency and reduce corruption in the oil and other minerals industries across the world.

The article highlights some cases of "back-pedalling" in Africa, where countries find ways around the requirement of transparent accounting to siphon off money to corrupt individuals. Still, one could argue that the EITI exactly helps to highlight such behaviour.

Similarly, Azerbaijan which lost [] its EITI compliant country status earlier this year, and was downgraded to candidate. The major concern here is the involvement of civil society. NRGI put out a press-release [] condemning the beating of one of its advisory council board members, Ilgar Mammadov, by "high-ranking staff" of a prison where he's held since 2013.
Mr. Mammadov was arrested in in 2013 on charges of inciting mass violence in relation with an anti-government protest, and subsequently sentenced to 7 years in jail. The Council of Europe and European Court of Human Rights have ruled that the judgement was illegal and ordered his release []. The government chose to ignore that ruling. The Council of Europe withdrew [, see also CoE website] from a working group it had initiated with Azerbaijan due to its suppression on human rights defenders in past years. Following the beating Mammadov's life is reportedly [] in danger now.

We posted earlier on Azerbaijan, see here.

The Sight of inevitability II

A week late, but last weeks Economist [, some registration necessary, "Pegs under pressure" 7 oct 2015], seems to have an article inspired by a graph we posted earlier. It could be completely coincidental of course.

Saturday, October 10, 2015

What to do if you don't find oil? Build a spa!

A nice little story from Slovenia, where they searched for oil in the 1950's, and instead found hot springs. The oil driller left disillusioned, but the villagers mades pool around the thermal water source, which over time grew out to a complex that attracts more than 100.000 tourist each year.

Read the short story at RTV Slovenia [].

Thursday, October 8, 2015

FT opinion: ‘Fossilist’ finance blocks ‘clean trillion’

The FT has an interesting piece from David Pitt-Watson (executive fellow of finance at London Business School and chair of the UN Environment Program Finance Initiative)  claiming that "Capital markets have unintended bias to unsustainable investment."

Thursday, October 1, 2015

OxCARRE Seminars

The seminars of OxCARRE during the coming term will be can be found here.

OxCarre Seminar Series

Tuesdays at ***14.30hrs***
(unless otherwise stated*)
Seminar Room C,
Manor Road Building (Second Floor), Manor Road, Oxford OX1 3UQ

20 October– 2 seminars:

2.30pm, Seminar Room C
Speaker:  Erwin Bulte (Wageningen University)
Title:  TBA
5.30pmSeminar Room A
Speaker:  Ian Lange (Colorado School of Mines)
Title: TBA

3 November– 2 seminars:   

2.30pmSeminar Room C
Speaker:  Ragnar Torvik (NTNU)
Title:  TBA
5.30pmSeminar Room A
Speaker:  Meredith Fowlie (University of California, Berkeley)
Title:  TBA

24 November

Speaker: Dominic Rohner (University of Lausanne)
Title: TBA

1 December

Speaker: Radek Stefanski (University of St Andrews)
Title:  TBA



OxCarre  Lunchtime Seminar Series

Wednesdays at 12noon
(unless otherwise stated*)
Seminar Room D,
Manor Road Building (Second Floor), Manor Road, Oxford OX1 3UQ

14 October

Speaker:  Pierre-Louis Vézina (UCL)
Title:  TBC

28 October

Speaker: Fanny Henriet (Paris School of Economics)
Title:  Grey Paradox: How fossil fuel owners can benefit from carbon taxation

18 November

Speaker:  Emma Hooper (Aix Marseille School of Economics)
Title:  TBC

New OxCARRE Research papers: fiscal federations, mining close spillovers, firm selection, and structural transformation

There are new working papers from OxCARRE out, to be found here []

Heterogeneous Vertical Tax Externalities, Capital Mobility, and the Fiscal Advantage of Natural Resources
Fidel Perez-Sebastian (University of Alicante / Hull), Ohad Raveh (OxCARRE) and Yaniv Reingewertz (University of Haifa)
How do state tax rates respond to federal tax shocks? This paper presents a novel mechanism of heterogeneous vertical tax externalities across levels of fiscal advantage, showing that tax increases can be expansionary - even without their reinvestment. States rich with natural resources have a fiscal advantage in the inter-state competition over production factors which allows them to respond better to changes in federal taxes and, consequently, attract capital from other parts of the nation. We add heterogeneity in fiscal advantage levels to an otherwise standard model of vertical tax externalities and horizontal tax competition; the model shows that, irrespective of federal redistribution, the contractionary effect of a federal tax increase can be overturned in states with high fiscal advantage, through an increase in their tax base. Using the case of the U.S., and narrative-based measured federal tax shocks a-la Romer and Romer (2010), we provide empirical evidence for the various aspects of this mechanism. Specifically, our lower-bound estimates indicate that, controlling for federal transfers, a 1% increase in the GDP share of capital-related federal taxes at the beginning of a year increases the growth in the per capita tax base by approximately 1.6% in high fiscal advantage states at the end of it, on average.
available here [pdf,

Mining closure, gender and employment reallocations: the case of UK coal mines
Fernando M. Aragon (Simon Fraser University), Juan Pablo Rud (Royal Holloway) and Gerhard Toews (OxCARRE)

This paper examines the heterogenous effect of mining shocks on local employment, by gender. Using the closure of coal mines in UK starting in mid 1980s, we find evidence of substitution of male for female workers in the manufacturing sector. Mine closures increase number of male manufacturing workers but decrease, in absolute and relative terms, number of female manufacturing workers. We document a similar, though smaller, effect in the service sector. This substitution effect has been overlooked in the debate of local impacts of extractive industries, but it is likely to occur in the context of other male-dominated industries. We also find that mine closures led to persistent reductions in population size and participation rates
available here [pdf,]

The impact of windfalls: Firm selection, trade and welfare
Gry Østenstad (Buskerud and Vestfold University College and University of Oslo) and Wessel N. Vermeulen (OxCARRE)
We ask how a small open economy with heterogeneous firms responds to a resource windfall. A resource windfall boosts demand but also affects wages such that production costs increase. The result is a higher number of firms and renewed selection among firms: New firms at the lower end of the productivity continuum can produce for the domestic market, while only the most productive firms continue to export. While the share of firms that sell traded varieties decreases, the average productivity of exporting firms increases. The increase in the number of varieties following the increase in the number of firms and the inflow of additional imports implies that there is an increase in aggregate welfare over and above the direct windfall gain. We provide analysis in a model with two types of labor. The windfall causes a reallocation of labor types and a change in relative wages, thereby implying different welfare outcomes for each type of labor and the possibility of rising inequality.
available here [pdf,]

Commodity Price Shocks, Growth and Structural Transformation in Low-Income Countries
Thomas McGregor (OxCARRE)
This paper uses a panel-VAR approach to estimate both the dynamic and structural macroeconomic response of resource-rich, low-income countries to global commodity price shocks. I use a Block recursive ordering, as well as a simple Choleski decomposition, to identify structural commodity price shocks for a set of developing countries. The Block recursive identification strategy assumes only that global macroeconomic conditions do not respond to individual low-income country conditions contemporaneously. The results suggest that a one standard deviation increase in commodity prices (around 19% on average) raises per capita income levels, government spending and investment in developing countries by 0.03%-0.05%. Commodity price shocks also result in significant transformation of these economies, with the share of value-added in manufacturing contracting by 0.25 percentage points; although within this, the share of value-added in agricultural manufactures, for example, expands by around 1.5 percentage points. Whilst these effects may appear small, they represent the effect of exogenous commodity price shocks that are not due to changes in aggregate demand or global financial conditions. Taken together, these results present a more nuanced picture of the ’resource curse’ in poor countries. Whilst per capital income levels are positively affected by resource booms, the potential for deindustrialisation, particularly in export oriented manufacturing sectors, does exist. The channel through which this link operates appears to be the real exchange rate, with resource booms leading to appreciation pressures. To illustrate these results, I simulate the impact of the recent oil price collapse on the Nigerian economy.