New OxCARRE Research Papers

Rabah Arezki [imf.org], Patrick Bolton [columbia.edu], Sanjay Peters [columbia.edu, Copenhagen Business School], Frederic Samama (Amundi Asset Management) & Joseph Stiglitz [columbia.edu, Columbia University] write on

From Global Savings Glut to Financing Infrastructure: The Advent of Investment Platforms

Abstract

This paper investigates the emerging global landscape for public-private coinvestments in infrastructure. The creation of the Asian Infrastructure Investment Bank and other so-called “infrastructure investment platforms” are an attempt to tap into the pool of both public and private long-term savings in order to channel the latter into much needed infrastructure projects. This paper puts these new initiatives into perspective by critically reviewing the literature and experience with public private partnerships in infrastructure. It concludes by identifying the main challenges policy makers and other actors will need to confront going forward and to turn infrastructure into an asset class of its own.

Full paper at OxCARRE website here [pdf, oxcarre.ox.ac.uk].


and


Rabah Arezki [imf.org] and Thiemo Fetzer [University of Warwick trfetzer.com] write on


On the Comparative Advantage of U.S. Manufacturing: Evidence from the Shale Gas Revolution

This paper provides the first empirical evidence of the newly found comparative advantage of the United States manufacturing sector following the so-called shale gas revolution. The revolution has led to (very) large and persistent differences in the price of natural gas between the United States and the rest of the world owing to the physics of natural gas. Results show that U.S. manufacturing exports have grown by about 6 percent on account of their energy intensity since the onset of the shale revolution. We also document that the U.S. shale revolution is operating both at the intensive and extensive margins.

Full paper at OxCARRE website here [pdf, oxcarre.ox.ac.uk].

New Canadian Premier makes quick policy changes in Canada's oil development

Back in September we wrote on Canada's pipeline projects [oxcarre.blogspot.com]. The Economist writes [economist.com] now how the new Canadia PM Justin Trudeau might have to come true to his greener credentials without entirely decapitating the oil industry. What he did already is to virtually scrap the Northern Gateway Enbridge proposed pipeline from Alberta to British Columbia coast by imposing a moratorium [cbc.ca] on oil tankers off the coast. The alternative is a pipeline to the east coast or transport by rail. With regards to the latter, reports [jsonline.com] of accidents and derailed carriages, with punctured tanks spilling oil and ethanol in surroundings, continuing.

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 [duke.edu] and Daniel Raimi [duke.edu] both Duke University.

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

Abstract:

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 [nber.org]. 

Geotermal energy as natural resource: a starter

Geothermal energy is not something that is much written about in economic journals. I think this is remarkable to say the least, because there is some nice potential on identification using spatial techniques, while the countries involved, those that have developed geothermal power are often not the ones we associate with having energy resources of the fossil kind (below I list 5, France, Italy, Iceland, Japan, and New Zealand). The main reason may be that the amount of energy created with it as a share of the total for many countries is minor, even thought the local impact might by quite large. 

However, one should note that geothermal has both the potential as a source of electricity production through steam power, and by using the heat directly, for instance to heat buildings. The use of the latter than would result in saving of, for instance, gas to heat houses. So measuring total exploitation of geothermal energy can be a bit tricky. 

Geophysically it's also an interesting topic with regards to other renewable energy sources. A geothermal source needs to be managed, in the sense that, when exploited too much at a time it will exhaust. So there is a limit to be observed in order to make it a sustainable long-term producer. Not much different from something like fisheries I suppose.

So here a small country overview to get you started on a topic. They were selected based on what I came across. In terms of use, the US and China are the largest [wikipedia.org]. In terms of capacity, Indonesia and the US are, but Indonesia has not much production installed. All interesting variations that may be used for new research.

France
A geothermal source exists tight under Paris, which is being exploited to heat 170,000 homes (NYTimes.com). France banned fracking [FT.com], and while the proponents of fracking found that inconsistent with the approval for geothermal development, the judge disagreed. Find some more information of french geothermal development here [ea-gia.org]

Iceland
As a share of total energy production, Iceland ranks top. 65% of its energy use is derived from geothermal resources [wikipedia.org], most of it used for heating homes. It is the major facilitator for its aim to become the first country that lives entirely of renewable resources. If you write a paper, perhaps you can present it here [geothermalconference.is] next year.

Italy
The economist writes about Italian geothermal development in tuscany this week. Italy is the major [geosee.eu] exploiter of geothermal in Europe. In terms of numbers it is still a small percentage of total energy production [wikipedia.org].

Japan
Japanese onsen are the ultimate enjoyment of geothermal activity. The fact that one can find onsen scattered all over the country means that geothermal energy can be exploited throughout the county [wikipedia.org]. About 10% of national energy production was provided by geotermal plants. This is still low [japanfs.org] given the capacity. Development is still ongoing [cleantechnica.com]. According to Japanfs, Japan has the largest capacity for geothermal use after Indonesia and the US. I don't feature these countries here, but they may still be very interesting to look at.

New Zealand
New Zealand is boiling over with geothermal activity, especially on the North Island. A significant part of the energy supply comes from geothermal resources. Here we also find Professor Basil Sharp, at the University of Auckland who was visiting Oxford last year and has written about the topic. The interesting thing I also found was that geothermal resources have a special value and (religious) meaning for Maoris. So in order to exploit these resources, their rights and preferences are taken into account. At the same time, since they have ownership rights over some of the locations where geotermal energy can be exploited for commercial production, they can receive a royalty income stream (Sharpe and Malafeh, 2005 Energy Policy). So similar to what is observed in mining, there is a potential for local spillovers and development from natural resources.

Time to get these papers written!

New Research: Economics of modern energy boomtowns: do oil and gas shocks differ from shocks in the rest of the economy?

Alexandra Tsvetkova [ideas.repec.org] and Mark Partridge [osu.edu], both from Ohio State University, write on

Economics of modern energy boomtowns: do oil and gas shocks differ from shocks in the rest of the economy?

abstract:

The U.S. shale boom has intensified interest in how the expanding oil and gas sector affects local economic performance. Research has produced mixed results and has not compared how energy shocks differ from equal-sized shocks elsewhere in the economy. What emerges is that the estimated impacts of energy development vary by region, empirical methodology, as well as the time horizon that is considered. This paper captures these dimensions to present a more complete picture of energy boomtowns. Utilizing U.S. county data, we estimate the effects of changes in oil and gas extraction employment on total employment growth as well as growth by sector. We compare this to the effects of equal-sized shocks in the rest of the economy to assess whether energy booms are inherently different. The analysis is performed separately for nonmetropolitan and metropolitan counties using instrumental variables. We difference over 1-, 3-, 6-, and 10- year time periods to account for county fixed effects and to assess responses across different time horizons. The results show that in nonmetro counties, energy sector multiplier effects on total county employment first increase up to 6-year horizons and then decline for 10-year horizons. In metro counties, 1-year differences analysis suggests crowding out though the multipliers are insignificant in longer horizons. We also observe positive spillovers to the nontraded goods sector, while spillovers are small or negative for traded goods. Yet, equal-sized shocks in the rest of the economy produce more jobs on average than oil and gas shocks, suggesting that policymakers should seek more diversified development.

Paper available here [pdf, uni-muenchen.de] 

Iran deal, Who get's to the riches first?

With the Iranian nuclear deal steadily progressing, there are reports on western oil companies trying to make deals with Iran on developing their oil and gas production. I found two conflicting reports on who's in the lead, European or US companies.

The Economist wrote a few months ago:

American officials, for their part, are diligently tightening the screws. When a large delegation of French businessmen returned from Tehran last year, many were warned by the American embassy in Paris that they should tread carefully and not sign preliminary contracts in Iran if they wanted to retain access to American financial markets. A group of Germans received a similar warning a few months later. The thought of having their dollars frozen under American banking sanctions, or of being locked out of America’s capital markets altogether, has cooled enthusiasm for doing business in Iran. 

Yet some foreign businessmen moan that American companies are not playing by the same rules. Rather than operate openly in Iran, many American firms are busily using local front men. One such middleman in the oil and banking business, who is a frequent visitor to Iran’s oil ministry, says prime contracts have already been snapped up. “If there is a nuclear deal, you will find overnight that the Americans have signed one-year options on the best projects,” he says. “The Europeans will be queuing up, but they will end up negotiating with Exxon Mobil and Chevron, just as happened in Libya.”

Such talk is particularly galling to companies from Western countries that were reluctantly pulled into applying sanctions. “We can’t help but think we have been played by the Americans,” says one European business leader.

Yet the Financial Times writes,

For the likes of Royal Dutch Shell, Eni of Italy and France’s Total, among those whose officials have met Iranian counterparts in Tehran, that day may be months away. Negotiations with US energy groups — absent since the nationalisations that followed the 1979 Islamic revolution — could be even further off. A complex range of restrictions will need to be rolled back in the US.

and further

Legislation and executive orders impose such wide-ranging restrictions on US business dealings with the country that American companies take them to mean that even hypothetical discussions about post-sanctions contracts are illegal. Not one US oil company says it has held talks about possible deals with Iran. Exxon’s understanding of the law is that its executives are barred from talking about business with any Iranian officials. Chevron says that it “acts in full compliance with US law and does not engage in business discussions with Iran.” Conoco, similarly, says it is not engaged in any such talks.

I find the FT report more convincing. The one "middleman" the Economist puts forward doesn't sound very credible when saying that contracts have already been "snapped up".  The rest sounds very speculative (I'm not familiar with the case of Libya or which time period this person was referring to, but probably the time that Ghadaffi signed the nuclear non-proliferation treaty, and became a 'respectable' leader again).

The Economist features low oil price, shale gas and the competition from the Middle East

This week's Economist opens with a leader on the dynamics surrounding the oil price, shale oil/gas production in the US and the conventional production in the Middle East. With more analysis further in (here and here).

Sliding oil price and the solvency of governments

As the oil price continues to slide to lower levels, the potential effects on government finances becomes more evident, especially since the slide does not appear very likely to be reversed majorly [FT.com] in the near future. (Opec did not cut [FT.com], but the major new supply from unconventional oil in North America such as fracking and the Canadian oil sands is not profitably at the current levels. It is only natural that the this new production will be cut [econbrowser.com] if prices do not increase for other reasons.)

One major difference in how countries may handle this new reality comes from their exchange rate regime. Although the Russian rouble appears to be impacted most [FT.com], or at least receives the most attention, all currencies of oil exporting countries with flexible exchange rates have been tracking the fall of the oil price [FT.com]. In fact, the Russian central recently stopped defending the currency against depreciation recently making it in fact more free floating than previously. The fall in real revenues in terms of their domestic currencies is mitigated by the depreciated currencies. Since governments have a major part of their expenses in the local currencies, the impact of the fall in oil price is partially offset by simultaneous nominal exchange rate depreciation. However, debts to external creditors, in particular those denominated in foreign currency, will become harder to finance. So even countries with floating exchange rates will probably make some adjustments to their budgets.

In contrast, the Venezuelan Peso is fixed against the US dollar. As the central government is heavily reliant on the oil revenues for squaring its budget, the impact of the oil price is stronger [FT.com] relative to the floating exchange countries. Prices of it's bonds have tumbled, reaching an annual yield of close to 20%. Venezuela is reported as having argued the most strongly for an OPEC production cut in order to support the price, but countries that argued for this lost the decision as OPEC decided to leave production unchanged [FT.com].

It should be noted that the oil price dynamics functions more like a looking glass that reveals the true characteristics of governments and an economy. Although Norway may have to make some changes in their budget, their massive savings funds allows them any adjustment to be smooth and balanced. The decisions to manage revenues in this way have been taken years ago, exactly to account for a volatile oil price. The recent Russian assertiveness into its western neighbours, with the EU and US response just adds to the nervousness of the economic prospects. That Venezuela has been mismanaged for years becomes only clearer as the government runs out of cash to finance its unfortunate welfare programs.