The Optimal Carbon Tax and Economic Growth

New OxCarre paper:  In a calibrated integrated assessment model we investigate the differential impact of additive and multiplicative damages from climate change for both a socially optimal and a business-as-usual scenario in the market economy within the context of a Ramsey model of economic growth. The sources of energy are fossil fuel which is available at a cost which rises as reserves diminish and a carbon-free backstop supplied at a decreasing cost. If damages are not proportional to aggregate production output, and the economy is along a development path, the social cost of carbon and the optimal carbon tax are smaller as damages can more easily be compensated for by higher output. As a result, the economy switches later from fossil fuel to the carbon-free backstop and leaves less fossil fuel in situ. This is in contrast to a partial equilibrium analysis with damages in utility rather than in production which finds that the willingness to forsake current consumption to avoid future global warming is higher (lower) under additive damages in a growing economy if the elasticity of intertemporal substitution is smaller (bigger) than one.

The determinants of extreme commodity prices

New OxCARRE paper: Fat-tailed commodity price innovations are well-documented in the literature and long recognized as disruptive for consumers and producers, yet little is known about what factors drive such extreme events. Utilizing a wide range of factors from the economics and finance literature and quantile regression techniques, we shed light on this issue. Our models explain more variation in extreme than in median price innovations. Common global nancial and demand factors account for a greater proportion of extreme daily spot price variations than do commodity-speci c factors such as basis and open interest. Financialization of commodity markets, via signifi cant and increasing co-variation of extreme spot price innovations with US equity market and trade-weighted US dollar returns, appears to be a major driver of extreme events in the 2000-2009 period.

Optimal Oil Production and the World Supply of Oil

New OxCARRE Paper: We study the optimal oil extraction strategy and the value of an oil field using a multiple real option approach. The numerical method is flexible enough to solve a model with several state variables, to discuss the effect of risk aversion, and to take into account uncertainty in the size of reserves. Optimal extraction in the baseline model is found to be volatile. If the oil producer is risk averse, production is more stable, but spare capacity is much higher than what is typically observed. We show that decisions are very sensitive to expectations on the equilibrium oil price using a mean reverting model of the oil price where the equilibrium price is also a random variable. Oil production was cut during the 2008-2009 crisis, and we find that the cut in production was larger for OPEC, for countries facing a lower discount rate, as predicted by the model, and for countries whose governments' finances are more dependent on oil revenues. However, the net present value of a country's oil reserves would be increased significantly (by 100 percent, in the most extreme case) if production was cut completely when prices fall below the country's threshold price. If several producers were to adopt such strategies, world oil prices would be higher but more stable.

What Central Bankers Need to Know about Forecasting Oil Prices

New CEPR DP: Recent research has shown that recursive real-time VAR forecasts of the real price of oil tend to be more accurate than forecasts based on oil futures prices of the type commonly employed by central banks worldwide. Such monthly forecasts, however, differ in several important dimensions from the forecasts central banks require when making policy decisions. First, central banks are interested in forecasts of the quarterly real price of oil rather than forecasts of the monthly real price of oil. Second, many central banks are interested in forecasting the real price of Brent crude oil rather than any of the U.S. benchmarks. Third, central banks outside the United States are interested in forecasting the real price of oil measured in domestic consumption units rather than U.S. consumption units. Addressing each of these three concerns involves modeling choices that affect the relative accuracy of alternative forecasting methods. In addition, we investigate the costs and benefits of allowing for time variation in VAR model parameters and of constructing forecast combinations. We conclude that quarterly forecasts of the real price of oil from suitably designed VAR models estimated on monthly data generate the most accurate forecasts among a wide range of methods including forecasts based on oil futures prices, nochange forecasts and forecasts based on models estimated on quarterly data.

Shale Gas Development and Property Values

New NBER WP: While shale gas development can result in rapid local economic development, negative externalities associated with the process may adversely affect the prices of nearby homes. We utilize a triple-difference estimator and exploit the public water service area boundary in Washington County, Pennsylvania to identify the housing capitalization of groundwater risk, differentiating it from other externalities, lease payments to homeowners, and local economic development. We find that proximity to wells increases housing values, though risks to groundwater fully offset those gains. By itself, groundwater risk reduces property values by up to 24 percent.

Regulating the Resource Curse

Foreign Policy: It's not often that a change in accounting rules could reduce the probability of war. But that's exactly what happened at the U.S. Securities and Exchange Commission (SEC) last week.
On Wednesday, the SEC finally enacted long-overdue regulationsrequiring any oil company that is publicly listed on a U.S. stock exchange to report the tax, royalty, and other payments it shells out to foreign governments where it operates. Previously, companies were able to conceal this information, enabling a culture of corrupt payoffs that kept the petrodollars flowing into authoritarian leaders' coffers -- even where it directly contravened U.S. interests.

Natural Resource Abundance, Growth, and Diversification

MENA is one of the richest regions in the world in terms of natural resources: it holds more than 60 percent of the world’s proven oil reserves, mostly located in the Gulf region, and nearly half of gas reserves. Oil represents 80-85 percent of merchandise exports in the region, making it highly depending on fluctuations in international prices. A long strand of economic literature has suggested that such dependence may hurt a country’s growth prospects and the scope for job creation by reducing economic diversification...

A forthcoming World Bank volume focused on the Middle East and North Africa.