Arezki and Blanchard: Seven Questions About The Recent Oil Price Slump

Rabah Arezki, who recently visited us, writes on IMFDirect together with IMF's chief economist Olivier Blanchard on the implications of declining oil price on the world economy.

Oil prices have plunged recently, affecting everyone: producers, exporters, governments, and consumers. Overall, we see this as a shot in the arm for the global economy. Bearing in mind that our simulations do not represent a forecast of the state of the global economy, we find a gain for world GDP between 0.3 and 0.7 percent in 2015, compared to a scenario without the drop in oil prices. There is however much more to this complex and evolving story. In this blog we examine the mechanics of the oil market now and in the future, the implications for various groups of countries as well as for financial stability, and how policymakers should address the impact on their economies.

Read on here [imf.org]

'Low oil price? increase carbon price!', Maria van der Hoeven (Exec-Dir. IEA) states

Maria van der Hoeven, executive-director of the International Energy Agency, writes in The Huffington Post and Energy Post that policy makers should take the opportunity to implement or sustain policies that encourage efficient use of fossil fuels and stimulate the case for renewables. This includes lowering subsidies in fossil fuel use, existing mostly among developing countries and increase the carbon price in developed countries, to offset the negative consequences of increased oil/gas use triggered by the low prices of today. 

NYT: gas and middle-east peace

The New York Times reported [nytimes.com] on how the special structure put around the exploitation of the gas field in the Israeli part of the Mediterranean may help create economic linkages that ultimately could help in fostering peace with its neighbours.

Natural gas is both a geopolitical tool and a target in Israel, where a newfound bonanza of resources has the potential to improve ties with energy-hungry Egypt, Jordan and even the Palestinian Authority.
But the linchpin of this diplomatic push is not an Israeli official, a Middle Eastern king or an American ambassador. It is an oil company in Texas.

Big Oil and the value of their assets 2

In an update to a post [oxcarre.blogspot.com] of last summer, the UK Energy Secretary has backed [FT.com] the idea that oil companies' reserves may need to be revalued in light of the world's commitment to not exceed aparticular stock of carbon in the atmosphere. 

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).

Everybody loves SWF

FT's Gillian Tett comments [FT.com] on the sudden popularity of Sovereign Wealth Fund constructs, including among western countries. She notes in particular that the UK Treasurer Osborne announced to set up one in his autumn statement [FT.com]:

we’re announcing a new Sovereign Wealth Fund for the North of England so that the shale gas resources of the North are used to invest in the future of the North.

The revenues of shale gas are for now still largely illusionary. The question why the UK didn't set up a SWF for for their real revenues from the North sea was discussed in the Guardian [oxcarre.blogspot.com] not too long ago. On the OxCARRE [oxcarre.ox.ac.uk] website you'll find further research on Sovereign Wealth Funds and optimal savings of commodity export revenues.

OxCARRE Seminar: Thorvaldor Gylfason - The Dutch disease in reverse. Iceland's natural experiment

Today presenting at OxCARRE: Thorvaldor Gylfason (University of Iceland)

The Dutch disease in reverse: Iceland's natural experiment.

Abstract

Abundant natural resources brought Iceland a systemically overvalued currency, with adverse effects on the secondary tradable sector. During 2003-2008 another national treasure, the sovereign’s AAA rating, was used to attract foreign capital, elevating the real exchange rate even further. The financial collapse in 2008 left the country with a large foreign debt without the possibility of rollovers in international capital markets. This offset some of the effect of the natural resources on the real exchange rate; in effect, this was the Dutch disease in reverse as witnessed, in particular, by a massive increase in the number of tourists in recent years. 

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. 

Today at the OxCARRE Seminar: Rabah Arezki on News Shocks in open economies

Today presented at OxCARRE by Rabah Arezki [img.org]

News Shocks in Open Economies: Evidence from Giant Oil Discoveries
co-authored with Valerie A. Ramey and Liugang Sheng

Abstract:

This paper explores the effect of news shocks on the current account and other macro variables using plausibly exogenous variation in the timing of worldwide giant oil discoveries as a directly observable measure of news shocks about future output ̶ the delay between a discovery and production is on average 4-6 years. We first present a model predicting differential effects for news and materialized shocks on the current account and other macroeconomic variables. Our empirical estimates are qualitatively in line with the predictions of the model. After an oil discovery, the current account and saving rate become negative for about 5 years and then turn positive. Investment rises robustly in the short-run, while GDP does not rise until after 5 years. In contrast to some findings from the news literature, we find that employment falls in response to news.

Available here [rice.edu] 

New OxCARRRE Research: Emergence of Sovereign Wealth Funds

Newly posted at the OxCARRE Research papers, from Jean-François Carpantier (University of Luxembourg) and Wessel Vermeulen (OxCARRE)

Emergence of Sovereign Wealth Funds

Abstract:

This paper tests the theoretically founded hypothesis that the surge of SWF establishments is determined by three main factors: 1) the existence of natural resources profits, 2) the government structure and 3) the ability to invest usefully in the domestic economy. We test this hypothesis on a sample of 20 countries that established an SWF in the period 1998-2008 by comparing them to the roughly 100 countries that did not set up a fund in the same period. We find evidence for all three factors. The results suggest that SWFs tend to be established in countries that run an autocratic regime and have difficulties finding suitable opportunities for domestic investments. We do not find the net foreign asset position of a country to be similarly related to the explanatory variables, indicating that the establishment of an SWF is distinct from a national accounting result. We argue that our results indicate that it is relevant to study how an SWF interacts with the domestic economy and government policy.

Denmark's 100% renewable energy push

The New York Times, in its series on solutions to climate change, reports on the policy of Denmark to "to end the burning of fossil fuels in any form by 2050 — not just in electricity production, as some other countries hope to do, but in transportation as well."

they keys to success: 

• plenty of wind power,
• good electricity connections to Sweden's nuclear power, and Norway's hydroelectric plants (without competition from neighbouring countries),
• hopefully new technology that can bring a transformation in the transport sector. 35 years to go, why not?

New Research: Mining away the Preston Curve

New research from Ryan B. Edwards at the Australian National University,

Mining away the Preston Curve

Abstract:

I estimate the long-term national health and education impacts of mining, with causal
effects identified by historical geological variation in fossil fuel endowments. Countries
with more mining tend to have poorer health and education outcomes than those with
similar per capita incomes, geographic characteristics, and institutional quality. Divergences from the “Preston curves” for health and education can be explained by the size of the mining sector. Income from sectors other than mining tends to deliver better social outcomes and the socioeconomic costs of forgoing future fossil fuel extraction are likely to be overstated. 

New OxCARRE research: The Resource Curse: A statistical mirage?

Newly posted on the OxCARRE discussion papers, from alumni Alex James, now at the University of Alaska Anchorage,

The Resource Curse: A statistical mirage? 

Forthcoming in Journal of Development Economics

Abstract:

A surprising feature of resource-rich economies is slow growth. It is often argued that natural-resource production impedes development by creating market or institutional failures. This paper establishes an alternative explanation—a slow-growing resource sector. A declining resource sector is disproportionately reflected in resource-dependent countries. Additionally, there is little evidence that resource dependence impedes growth in non-resource sectors. More generally, this paper illustrates the importance of considering industry composition in cross-country growth regressions.

The way forward for Alberta's heritage fund, a contribution from OxCARRE

From Calgary's The School of Public Policy,

Albertans have long known that their provincial government has shown a lack of discipline when it comes to investing royalty revenues into the Heritage Savings Trust Fund. Meanwhile, Norway has built a massive fund that pays for almost all social services. What went wrong? And is it too late to be fixed?

Those are the questions asked and answered by a ground-breaking new report released today by The School of Public Policy. Authors, Ton van den Bremer and Rick van der Ploeg of Oxford University take a hard look at the state of Alberta's savings.

They propose that Alberta becomes much more serious about saving its revenues if it intends to reap benefits from it for the longest possible time.

Read on here [newswire.ca]

for the full report here [policyschool.ucalgary.ca]

IMF Blog: 'Natural Gas: The New Gold'

Rabah Arezki, head of the commodities team in the IMF’s Research Department, writes on Natural gas at the IMF Blog:

Natural gas is creating a new reality for economies around the world. Three major developments of the past few years have thrust natural gas into the spotlight: the shale gas revolution in the United States, the reduction in nuclear power supply following the Fukushima disaster in Japan, and geopolitical tensions between Russia and Ukraine.

read on here [imf.org]

OxCARRE Seminar: David Jacks

Today at the OxCARRE David Jacks (Simon Fraser University) on

From Boom to Bust: A Typology of Real Commodity Prices in the Long Run
This paper considers the evidence on real commodity prices over 160 years for 30 commodities representing 7.89 trillion USD worth of production in 2011. In so doing, it suggests and documents a complete typology of real commodity prices, comprising long-run trends, medium-run cycles, and short-run boom/bust episodes. The findings of the paper can be summarized as follows: real commodity prices of both energy and non-energy commodities have been on the rise from 1950 across all weighting schemes; there is a consistent pattern, in both past and present, of commodity price super-cycles which entail decades-long positive deviations from these long-run trends with the latest set of super-cycles likely at their peak; these commodity price super-cycles are punctuated by booms and busts which are historically pervasive and becoming more exacerbated over time. These last elements of boom and bust are also found to be particularly bearing in determining real commodity price volatility as well as potentially bearing in influencing growth in commodity exporting economies.

Obtain here [sfu.ca], underlying data available at his website.

OxCarre Seminar: Ralf Martin

Today Ralf Martin [imperial.ac.uk] (and here [ralfmartin.me.uk]) presents at OxCARRE on

The Causal Effects of the European Union Emissions Trading Scheme: Evidence from French Manufacturing Plants

Freakonomics podcast discusses Norway

The Freakonomics podcasts discusses Norway's dealings with oil, including its first experiments with Dutch disease, setting up a Sovereign Wealth Fund with 'ethical' rules on investment, the paradox of selling oil and aiming to have the greenest economy in Europe (including being No. 2 in terms of Tesla's sold in the world). The podcasts also includes some comments from Daron Acemoglu on the role of institutions in the resource curse. The podcasts ends with some thoughts on the lessons from other countries. Should others set up a fund as well?

read or listen.

Ps. Self-advertisement warning! I'll exactly address that last question in my seminar next week :)

The effects and consequences of the recent falling oil prices

During the past week there have been numerous reports on the possible effects and potential consequences of falling oil prices, currently around US$82 having been below US$80 [FT.com] earlier this week. Many people and with that businesses and governments had come used to US$100+ prices.

The economist [economist.com] wrote last week about the consequences of high-investment projects, that rely on higher prices to be profitable (in the long run). This includes shale in the US which on average runs on projects that break-even at US$75 [FT.com], although there is obviously variations among project, and oil-spot prices may be less relevant as producers have there prices hedged using options and forward contract.

Russia relies on US$100+ oil to balance its books, although it's floating ruble and accumulated reserves will form a cushion for the immediate future writes mr. Guriev (a Russian economist currently at Science Po) in the FT [FT.com].

One of the reasons oil prices are down is probably the same as the reason for abysmal stock-market performance in the last month or so, with major losses during the past week: expected weak demand from a slowing world economy. Nevertheless, the CEO of BlackRock, a major US investment institution, Fink saw the silver lining [FT.com]: "It's a good buying opportunity (...) the oil price decline is a tax cut for global consumers."

This week's Economist [economist.com] asks whether it is indeed lower demand that brought oil prices down, indicating a slowing economy, or increasing supply from OPEC, the US and even Russia. Boringly, as always, probably a bit of both. All of the potential consequences mentioned above will only realise, if at all, when the price of US$100 will become the new normal for the foreseable future, or whether instead it is the large price swings in relatively short period, i.e. volatility, that is the major feature to follow.

'Wind power is cheapest energy, EU analysis finds'

The Guardian writes about a new report that finds that when including externalities from energy production (health/pollution/carbon costs etc) wind energy comes out rather favourably.

The article mentions that there are more reports to be expected in the near future coming up with their own estimate.

The trick is always to come up with prices that are not observed. For instance, Earlier this week we listened to a presentation that suggested that the social cost of carbon was 10x higher than the usually suggested $30/mtc just because uncertainty around climate outcomes had not been factored. 

New Research: Dutch Disease and the mitigation effect of Migration

New research forthcoming in Economic Journal by Michel Beine, Serge Coulombe and yours truly,

Dutch Disease and the mitigation effect of Migration: Evidence from Canadian provinces.

abstract:
This article evaluates whether immigration can mitigate the Dutch disease effects associated with booms in natural resource sectors. We derive predicted changes in the size of the non-tradable sector from a small general-equilibrium model à la Obstfeld–Rogoff. Using data for Canadian provinces, we find evidence that aggregate immigration mitigates the increase in the size of the non-tradable sector in booming regions. The mitigation effect is due mostly to interprovincial migration and temporary foreign workers. There is no evidence of such an effect for permanent international immigration. Interprovincial migration also results in a spreading effect of Dutch disease from booming to non-booming provinces.

New Research: The Economic Aftermath of Resource Booms

New research forthcoming in Economic Journal by Grant D. Jacobsen and Dominic P. Parker

The Economic Aftermath of Resource Booms: Evidence from Boomtowns in the American West

Abstract:
The current U.S. oil and gas boom is injecting labour, capital, and revenue into communities near reserves. Will these communities be cursed with lower long run incomes in the wake of the boom? We study the oil boom-and-bust cycle of the 1970s and 1980s to gain insights. Using annual data on drilling to identify western boom-and-bust counties, we find substantial positive local employment and income effects during the boom. In the aftermath of the bust, however, we find that incomes per capita decreased and unemployment compensation payments increased relative to what they would have been if the boom had not occurred.

OxCARRE at VoxEU: Norway is right to reassess its sovereign wealth fund

OxCARRE members Samuel Wills, Rick van der Ploeg, Ton van den Bremer write at VOXEU [voxeu.org] on

Norway is right to reassess its sovereign wealth fund

Norway’s sovereign wealth fund is the largest in the world. As such, it has prompted discussions about its design. This column argues that one flaw in the fund is that it doesn’t consider oil reserves beneath the ground. Changing the equity/bond mix and the spending rule could lead to significant welfare improvements.

OxCARRE Seminar: The Impact of Economic and Climate Risks on the Social Cost of Carbon

Today's OxCARRE Brown Bag Seminar 

Speaker: Thomas Lontzek (University of Zurich)

The Impact of Economic and Climate Risks on the Social Cost of Carbon

Abstract:
There is great uncertainty regarding the future of the economic system and regarding future climate conditions, uncertainty that is important for current and future policy making. We develop a multidimensional model that can be used to study the impact of uncertainty and risk in the economic and climate systems on the social cost of carbon. We find that economic and climate uncertainty each imply that this cost is a stochastic process even more uncertain than the economic and climate systems. Uncertainty tends to imply a greater social cost in the current decade, but has much more significant implications for the future. In particular, there is a significant probability that by 2100 the social cost of carbon will be ten times the value implied by the same models under conditions of no uncertainty. These findings are robust with respect to alternative specifications of recursive utility and exogenous risks.

New Research: Current accounts and oil price fluctuations in oil-exporting countries: The role of financial development

New Research from Jean-Pierre Allegret, Cécile Couharde, Dramane Coulibaly and Valérie Mignon on

Current accounts and oil price fluctuations in oil-exporting countries: The role of financial development

abstract:
Oil-exporting countries usually experience large current account improvements following a sharp increase in oil prices. In this paper, we investigate this oil price-current account relationship on a sample of 27 oil-exporting economies. Relying upon the estimation of panel smooth transition regression models over the 1980–2010 period, we provide evidence that refines the traditional interpretation of oil price effects on current accounts. While current accounts are positively affected by oil price variations, this effect is nonlinear and depends critically on the degree of financial development of oil-exporting economies. More specifically, oil price variations exert a stronger impact on the current account position for less financially developed countries, this influence diminishing with financial deepness.

New Research: The Political Economy of Policy Volatility in Latin America

Just published in Latin American Politics and Society, by David Doyle

The Political Economy of Policy Volatility in Latin America

abstract:

Why are some Latin American states plagued by persistent policy volatility while the policies of others remain relatively stable? This article explores the political economy of natural resource rents and policy volatility across Latin America. It argues that, all else equal, resource rents will create incentives for political leaders, which will result in repeated episodes of policy volatility. This effect, however, will depend on the structure of political institutions. Where political institutions fail to provide a forum for intertemporal exchange among political actors, natural resource rents will result in increased levels of policy volatility. Alternatively, where political institutions facilitate agreement among actors, resource rents will be conducive to policy stability. This argument is tested on a measure of policy volatility for 18 Latin American economies between 1993 and 2008. The statistical tests provide support for the argument.

WWF: 'Half of global wildlife lost due to human demand on Natural Resources'

This morning a representative of WWF on BBC Radio 4 Today, told about a new report, 'the living planel', WWF issued on the decline of animals populations, amounting to 52% from 1970 to 2010. The numbers are based on a peer reviewed process on 10.000 populations around the world. The main cause for decline is suggested to be human demand on natural resources such as water, forest. Interestingly, high-income countries saw a net increase in animal populations, while there is a drastic decrease among middle- and low-income countries, even though the `ecological footprint' per person among high-income people is by far the highest. One of the three recommendations, perhaps for economists to take into account more often than is happening now with there research: "Value natural capital as a cornerstone of policy and development decisions."

See reports on this here [reuters.com] and here [vice.com], or tomorrow's Radio 4 Today On Demand service (around 7h20).

New research: The local wealth and health effects of mining in developing countries

New research of two students of Columbia University: Jan von der Goltz and Prabhat Barnwal on:

The Local Wealth and Health Effects of Mining in Developing Countries

Abstract:
Do residents of mining communities face health-wealth trade-offs? We conduct the first extensive assessment of this question using micro-data from communities near about 800 mineral mines in 44 developing countries. Mining communities enjoy a substantial medium-term rise in asset wealth (0.3σ), but experience a ten percentage point increase in anemia among adult women, and a five percentage point increase in the prevalence of stunting in young children. Prior evidence links both of these health impacts to metal toxicity – and in particular, exposure to high levels of lead. We find no systematic evidence of general ill health in mining communities, and we observe health impacts only near mines of a type where metal pollution is to be expected. Benefits and costs are strongly concentrated in the immediate vicinity (≤ 5km) of a mine. We employ seven distinct identification strategies. Baseline results come from a cross-sectional group effects model, and mine-level and mother-level panels. An in- strumental variables approach serves as a robustness check. To demonstrate that the observed health impacts are due to pollution, we develop three difference-in-difference tests tailored to the known association of certain mine types with heavy metal pollution, and to the pathophysiology of lead toxicity. Our results add to the nascent literature on health impacts near industrial operations in developing countries.

New research: Oil and ethnic inequality in Nigeria

New (primilimary) research of James Fenske and Igor Zurimendi:

Oil and ethnic inequality in Nigeria

Abstract:
Early-life oil prices predict differential adult outcomes across Nigerian ethnic groups. Our difference-in-difference approach compares members of southern ethnicities to other Nigerians from the same birth cohort. Greater prices in a southern individual’s birth year predict positive outcomes, including reduced fertility, delayed marriage, higher probabilities of working and having a skilled occupation, and greater schooling. By contrast, health outcomes suffer, including reduced height and increased BMI. No single ethnicity drives our results. Fertility, higher Southern incomes, greater Southern conflict, declining food production, and reinforcing parental investments help explain these results. Religion and selective mortality do not.

Although available online, perhaps better contact authors directly for a draft.

Rockefeller fund divests from oil and coal as climate talks preparations start in New York

The FT is reporting [ft.com] on "the heirs to the Rockefeller oil fortune", who will divest immediately from its coal (they read Tony and Paul's well-argued plea apparently [pdf from oxcarre.ox.ac.uk]) and Canada's tar sands holdings, and review further fossil fuel holdings over the next couple of years. The fund will target renewable energy investments instead.
In addition, in an analysis piece, this action is explained as part of a bigger movement ahead of the New York climate meeting this Tuesday and Paris meeting in December next year. Apparently there exist a broad bases among businesses around the world that action is needed.

Both pieces make some interesting notes.

"The World Bank announced at Monday’s meeting that more than 1,000 companies and investors had expressed support for putting a price on the carbon dioxide emissions from burning fossil fuels that drive climate change. They include Shell, which has had an internal carbon price for some years, as well as Nokia, LG Electronics and Lego. A total of 73 national and 11 regional governments responsible for 54 per cent of global greenhouse gas emissions are now pricing carbon or plan to do so, the World Bank said, including China, the EU, and several US states."

This is currently on the front page of the World Bank website, further here [worldbank.org]

"the rise of a fossil fuel divestment movement that argues investors need to be mindful that most of the coal, oil and gas reserves in publicly listed companies need to stay in the ground if the world is to avoid a potentially dangerous 2 degrees Celsius of global warming from pre-industrial times."

something blogged on earlier, and appears to originate from the NGO Carbon Tracker [carbontracker.org].

The FT further writes that these divestments from the 'oil majors', such as now announced by the Rockefeller fund, remains relatively modest in respect to the size of the big oil companies and is therefore not likely to move their stock prices. And if they do, it will probably just increase the yield, since the companies themselves are pretty confident that demand for their product, and with that their profits, will remain robust for the near and medium term future.

However, if yield for investors mirrors the funding cost of the companies' projects, we can expect perhaps two responses: 1) more action in renewable energy from the oil companies to compensate for their image and thereby provide some reasons for investors to stay, or 2) more debt financing by banks or through bonds. A quick check shows that the oil majors are about 50/50 financed by equity and debt, of which long-term debt is really just a minor stake (less then 10% for shell and Exxon, a bit more for BP).

Anyways, first the share price will need to be affected by the divestment operations before any of this is going to happen.  Rockefeller representatives themselves called it for now "symbolic".

Morocco-Western Sahara and (exploratory) oil drilling

The FT reports on exploratory drilling off the coast of Western Sahara:
Battle for oil fuels Africa’s lengthy conflict

The political issue is that the territory is under Moroccan control, but not settled. Although Morocco promises that any eventual benefits will be shared with the people of Western Sahara, some doubt how "equitable" this will really be.

"But the drilling at the block known as Cap Boujdour is highly controversial: detractors insist it is outright illegal; supporters disagree, even though many also acknowledge that the campaign will test international law. The reason is the complex status of Western Sahara, the world’s only non-self governing territory without a legal administering authority.
The debate centres around a UN legal ruling from 2002 that drilling in the territory would be legal if it were done for the “benefit of the peoples” living there."

The question will be what happens to the frozen conflict if oil is found? Would it provide a basis for establishing peace and provide opportunities for development of all peoples in a way they wish? 

On the links between CO2, FDI and GDP growth

A new working paper [ideas.repec.org] from IPAG business school:

Causal interactions between CO2 emissions, FDI, and economic growth: Evidence from dynamic simultaneous-equation models

In this article, we investigate the causality links between CO2 emissions, foreign direct investment, and economic growth using dynamic simultaneous-equation panel data models for a global panel of 54 countries over the period 1990–2011. We also implement these empirical models for 3 regional sub-panels: Europe and Central Asia, Latin America and the Caribbean, and the Middle East, North Africa, and sub-Saharan Africa. Our results provide evidence of bidirectional causality between FDI inflows and economic growth for all the panels and be- tween FDI and CO2 for all the panels, except Europe and North Asia. They also indicate the existence of unidirectional causality running from CO2 emissions to economic growth, with the exception of the Middle East, North Africa, and sub-Sahara panel, for which bidirectional causality between these variables cannot be rejected. These empirical insights are of particular interest to policymakers as they help build sound economic policies to sustain economic development.

The Economist on innovation in Canada's oil sands

Last week's Economist article on innovation in Canada's oil sands.


The Steam from below
New technologies are being used to extract bitumen from oil sands

This week's oil as kingmaker in politics

Two stories, completely unconnected and different, where oil will play a big role in the outcome of plebiscites.

In Brazil, the presidential elections, scheduled for October 5, are affected by a major (alleged) corruption scandal involving the state oil company Petrobas. The Economist reports: "Mr Costa, who ran Petrobras’s refining division from 2004 to 2012, has accused more than 40 politicians of involvement in a vast kickback scheme. The list reportedly includes a minister, three state governors, six senators and dozens of congressmen from President Dilma Rousseff’s Workers’ Party (PT) and several coalition allies." Although it does not appear that Ms. Rousseff is directly involved, it may have happened on her watch, and so benefits her challenger, Ms. Silva [ft.com].

In the UK, the referendum on Scottish independence [economist.com], scheduled September 18, revolves around many things, but there may never have been one if there was no North Sea oil in the first place. However, how much is actually left is still debated [econbrowser.com]. See also our previous posts, here and here, and a recent FT Lex column [ft.com].

Mining in outer space and property rights

Although it seems a pretty conventional simplification in economic to put natural resources as some exogenous wealth transfer in the budget constraint (i.e. instead of a properly modeled production sector, an early example is Sachs & Warner, 1995, NBER 5398, p. 37), during the early days of my PhD I was challenged to back that assumption up a bit better. Shouldn't you model the process of discovery and trade properly? I used this article [BBC.co.uk] (original study here [nature.com]), suggesting that gold came with meteorites to earth from outer space in the first place, to show that the simplification is valid, because the alternative becomes unwieldy requiring not only to model the planet but indeed the universe (a true economist's reply, if I may say so).

Now it appears that we may not be waiting for stuff to come to us, but explore space itself. Notwithstanding the physical barriers, there is a niftier one: the law. VOX [vox.com] reports that the US congress is considering a bill (acronym: ASTEROID) to provide the appropriate regulatory framework and property rights, in order to incentivise future investments. The issue is that a 1967 UN treaty prohibits any nation to expropriate celestial bodies, but allows free use of them. But does this allow private corporations to expropriate bodies (since they are not nations), or is mining (and the stuff you bring back) considered under 'use' (NASA took moon dust/stones back to earth and claimed ownership)? More details on testimonies here [io9.com].

Dutch disease in local Canadian communities?

Recently (to be) published, a research on the impact of different types of natural resource industry (pure extraction vs. 'transformation' or processing) on 135 urban areas in Canada over 1971-2006. 

"Looking at 135 Canadian urban areas over a 35-year period (1971–2006), the paper examines the relationship between initial specialisation (using employment) in resource industries and various growth indicators via a mix of descriptive statistics and econometric modelling. The paper differentiates between two resources sectors: resource extraction (mining, logging, etc.); primary resource transformation (paper mills, foundries, smelters, etc.). The evidence for a “resource curse” is mixed. Resource transformation industries are found to be associated with slower population growth, also depressing growth in college-educated cohorts. However, no such relationship is found for resource extraction. We find no evidence for a durable Dutch Disease wage effect. Wages fluctuate in response to resource demand as do working-age populations. Many relationships hold only for the short run. In the end, we argue, the impact of resource specialisation depends on the particular resource and type of industry it spawns, as well as location. There is no generalisable resource curse, valid for all resources and all places."

Relates to a wider research on the local impact of natural resource industry, e.g. OxCarre's James and Aadland (2011, Maine and Wyoming counties), and Allcott and Kenistorn (WP 2014, US Counties) among others. The last sentence suggests that there is more scope in research on the conditions and determinants at play with respect to natural resource industry at the local level.

The aftermath of the 2012 Marikana tragedy

It has been a bit more than 2 years since 34 mine workers were killed by police in what became known as the Marikana massacre [ft.com], a South Africa based, Lonmin [lonmin.com] owned platinum mine. Protests had erupted over working and living conditions and pay [tandfonline.com]. The fatal riot was featured at the time at the OxCARRE blog, which pointed to the Economist's analysis laying the root cause of the tragedy to government management of mining sector in South Africa.

Controversy existed since the start over whether the police had acted in self-defence in the face of violent mine workers, or had been overly violent themselves. A government inquiry was established and independent researchers have done their own studies. The picture that seems to emerge is that the tragedy was preventable and police may have been instigated by Lonmin executives and/or government to act violently against the protesters (book by Johannesburg based academics [books.google.com], p3; NRC Handelsblad [nrc.nl], in Dutch subscribers only). The inquiry is still ongoing and a few days ago South Africa's deputy president Ceryl Rhamaphosa was accused by the mineworkers' lawyer of having ordered the police to use violence against the mineworkers. Mr. Rhamaphosa denies he acted in such way and stated [ft.com] that "the tragedy 'has to be approached as a collective failure by many role players.'" Mr. Rhamaphosa is currently one South Africa's wealthiest businessmen, at the time of the tragedy a non-executive of Lonmin, and formerly a union leader (and founder) of NUM. NUM was deemed by the mineworkers to be closer to business executives and the government then to their interests, which was one of the reasons they started their 'wildcat' strike or switched alliances to non-government backed unions. In all the strikes, and ultimately the tragedy, are a culmination of the failures to deal with apartheid racial differences, exploitation of migrant workers, including foreigners, and to conduct wage negotiations that result in a fair and supported outcome (Report of government backed labour market research body [lmip.org.za]).  

Meanwhile, the Guardian [theguardian.com] reports that Lonmin is planning to restructure (meaning closing or selling some of their mines) after 2 years of bad performance and a 5-month strike this year (its share price has decreased by 60% since the tragedy, but it was already in decline long before that). Lonmin [lonmin.com] denies decisions on the restructuring have been made. Costs have increased as the strikes have led to higher pay for both Lonmin and competitors' operated mines, while platinum prices have decreased [nasdaq.com] over the same period. For instance, AngloAmerican Platinum is also closing its least profitable mines [reuters.com] after miners had negotiated pay increases.  Strikes, reducing output up to 5.7% quarter-on-quarter, in turn has had a major impact on South Africa's economy, so much that the economy reported [ft.com] negative economic growth. There are also rumours that the trading giant Glancore was considering decreasing its 2013 acquired 25% stake in Lonmin. These rumours were more or less denied [miningglobal.com]. The closing of mines risks further unemployment for those that are already doing the lowest skill and most dangerous part of the mining operations.

In closing, Bram Vermeulen of NRC Handelsblad [nrc.nl] (in Dutch, for subscribers only) talked to widows of those miners that were killed about the taboo subject of 'second widows'. Migrant mine workers used to have families both at the mine location and their old homes where they had left there families, giving disputes to rights of compensation to the families of those killed workers. Migrant mineworkers are/were actually stimulated not to live in 'workers' hostels but in shanty towns where they could live with girlfriends or second wives. Consequently, they had to split their salaries over two families, which in part explains their demand for pay increases [limp.org.za, p.14].

'Islamic State was making $2M a day selling oil to smugglers.'

BloombergBusiness reports on the finance part of Islamic State. Instead of (or next to) backing from wealthy regional supporters, extracting ransoms, or smuggling drugs—the usual way in which other terrorist or rebel groups in the world tend to finance their operations—IS had until recently a very rewarding oil exports business going on. "U.S. officials and terrorism experts believe that by late June, Islamic State was raising as much as $2 million a day in petroleum revenue—though that amount is declining as it loses control of some oil fields and authorities crack down on cross-border smuggling."

Interesting details in the report: since the oil needs to be smuggled through middlemen, IS can only sell the oil at a ~50% discount from the world price. The middlemen tend to be locals, and much oil goes via the Kurdish region in Iraq to Turkey and Iran. Trade is done in cash, they hold no international network of bank accounts.

Regarding the last point, this cash is, I presume, American dollars (the report does not say anything about this). There must be piles of cash being stored somewhere, which the report says some intelligent agencies are looking into. The cash is used for recruitment abroad, and "its growing operations and territorial expansion." I'm missing some details here. On the famous Vice News report on Islamic State, you can see locals in the Syrian town of Raqqa, bulwark of IS, still using Syrian cash (see at 21:19, I checked the note, it looks like 100 Syrian Pound [£0.40]). How come this has still any value for use in a society that does not control the supply of it? Anyways, this oil trade generates dollar reserves that are perhaps kept separate of the local economy and is used solely for other smuggling/trade of food, weapons and whatever a typical terrorist organisation needs and cannot produce by itself. IS is also known to raise local taxes, which must be Syrian and Iraqi dollars. So this tax-cash may be used only for their local 'civilian' operations such as running the courts and paying those who patrol the streets to check on 'unislamic' behavior. In general, the details of governance of Islamic State remain largely unknown, which includes its fiscal and monetary policy and how they manage 'their' natural resources.

A while ago there were these startling reports that ISIS had robbed banks in Mosul, Iraq, allegedly taking 500bn Iraqi dinars ($430m) in cash. This, according to the FT, actually never happened. ISIS never even attempted to rob the banks.

update 11/09/2014: See NPR article and podcast.

ps. Many Muslims are not flattered by these people calling themselves Islamic State. An alternative is proposed as QS, but I find not many media using it thus far.

OxCARRE Seminars coming months

OxCarre Seminars – Michaelmas Term 2014

Tuesday 5.00pm

Seminar Room C

Manor Road Building

21 October

Speaker: Ralf Martin (Imperial College)

Title: The Causal Effects of the European Union Emissions Trading Scheme:  Evidence from French Manufacturing Plants

4 November

Speaker:  Ragnar Torvik (Norwegian University of Science and Technology)

Title: Local Natural Resource Curse?

18 November

Speaker:  Nimah Mazaheri (Tufts University)

Title: The Specialization Curse: The Effect of Economic Specialization on Public Goods Provision.

2 December

Speaker: Thorvaldur Gylfason (University of Iceland)

Title: TBC

Australia does away with the mining tax

Australia's conservative government reached a deal with a fringe party lead by a mining magnate Clive Palmer to scrap the Minerals Resource Rent Tax [The Guardian]. The tax resulted from a failed attempt to tax 'super-profits', and resulted in little revenue [Sydney Morning Herald], however its proceeds where to pay for some social welfare programs. Some of the programs will not be scrapped but paid through tweaking Australia's pension scheme. Reports are generally positive to scrapping the tax because it was badly designed, mainly to the benefit of mining companies. The mining companies have gone recently through several tax and regulatory regimes, from taxes on profits to carbon emissions. That these taxes are now scrapped doesn't mean that they will not return in some form or another in the future [FT], maybe under a new government. The main opposition, Labour, is fiercely against this overhaul. I suppose the demand for stable laws raised in Argentina, also holds to some extend in Australia. Isn't there a middle way?

For some academic research on Tax reforms and natural resources at a global scale, see a previous post on a new IMF study.

Shale/Oil companies to Argentina: Give us some stable laws.

Another shale story, this time Argentina. The Economist (Sorry this is last week's. I'm still behind due to holidays ;) ) writes that local towns are already warming up for an oil bonanza from one of the largest shale basins in the world. Yet many oil companies are not yet past exploration phase, and may delay production decisions until the Argentina government adopts some stable laws that safeguard the $140B-$200B required in investments.

Looks like great stuff for research on institutions as well as local economic development in preparation for an Oil boom. If anyone is aware of academic research on this case, let us know!

US Shale: Innovation race against exhaustion

FT offers an analysis setting out how oil companies active in US shale oil extraction find new ways to improve production in existing wells, and increase there expected recovery volumes. It is pointed out that without such technical innovation oil wells would exhaust very rapidly and with that the entire US shale boom. How much innovation is left is anyone's guess. Companies are optimistic. Some analysts see risks in the required price (below $100/barrel many wells would not be profitable) and the high decay rate of shale well production, despite technical innovation. At the same time, much of the rapid production growth is made possible through outside finance, rather than earnings through production. A decline in the opportunity to attract outside finance is therefore a risk for further growth. Now, however, the FT reports that this risk is diminishing as companies are able to finance their capital expenditures more and more from earnings of production.

Celebs keep coming to Canada's oil sands

Remember Neil Young's visit to Fort McMurrey? Now it's Leonardo DiCaprio going to Fort McMurray and the First Nations community of Fort Chipewyan, Canada's Globe and Mail reports. The article further features some replies from industry and government on the visit, including from a industry spokesman: "Like Canadians, we [the industry] are growing tired of the fad of celebrity environmentalists coming into the region for a few hours or a few days, and offering their ideas and solutions to developing this resource"

The Effect of the Mining Boom on the Australian Economy

Researchers at the Reserve Bank of Australia published a discussion paper on the effects of the Austrialian mining boom.

This paper estimates the effects of the mining boom in Australia, using a large-scale structural macroeconometric model, AUS-M. We estimate that the mining boom boosted real per capita household disposable income by 13 per cent by 2013. The boom has contributed to a large appreciation of the Australian dollar that has weighed on other industries exposed to trade, such as manufacturing and agriculture. However, because manufacturing benefits from higher demand for inputs to mining, the deindustrialisation that sometimes accompanies resource booms – the so-called ‘Dutch disease’ – has not been strong.

More precisely, the authors use the method of creating counterfactuals from a baseline. The counterfactual is the case where no mining boom occurs, while leaving some variables unchanged (i.e. world economic factors) and others to adapt endogenously (i.e. Australian economic factors).

The paper has already found some media coverage see: Sydney Morning Herald [30% went to buying cars], and ABC

Some sobering insights from Micheal Levi on world oil and gas markets and politics

In the plane, on my way back from holidays in Georgia, I read an interesting interview with Michael Levi (David M. Rubinstein Senior Fellow for Energy and the Environment and Director of the Maurice R. Greenberg Center for Geoeconomic Studies at the Council on Foreign Relations, a US think tank). For insights on the potential for US LNG to affect European productivity (main effect) and energy security (limited) in the face of severing Russian relations, beneficiaries of Iraqi oil production (in the end everyone), the new US' EPA carbon emission regulations for powerplants (the next best thing after the lack of comprehensive national regulation), and China (in frontier, i.e politically risky, countries, but not yet at the frontier of extraction and production technology), see the original at Oilprice.com. I read a republished version of the weekly GeorgiaToday.

Big Oil and the value of their assets if we will not burn it any longer

The Economist is reporting on the answer big oil companies (e.g. Exxon, Shell) have given to questions from big institutional investors on "how climate change might affect their business and, in particular, whether any of their oil reserves might become 'stranded assets'—unusable if laws to curb emissions of carbon dioxide became really tight. Exxon Mobil and Shell are the most recent to get back with their assessment of the risk: zero."

Optimal extraction when existing wells are limited in capacity.

Econbrowser: "Production flows from a given oil field naturally decline over time, but we keep trying harder and technology keeps improving. Which force is winning the race?" Hamilton reviews a recent paper by Anderson, Kellogg, and Salant (2014) who notice that production from existing wells do not respond to price movements, but the drilling of new wells does. They reformulate a Hotelling model taking that can explain this phenomenon based on capacity constraints of existing wells.

Fracking Growth

New discussion paper by Thiemo Fetzer, who presented it earlier this year at OxCarre

This paper estimates the effect of the shale oil and gas boom in the United States on local economic outcomes. The main source of exogenous variation to be explored is the location of previously unexplored shale deposits [, which is used to] to estimate the localised effects from resource extraction. Every oil- and gas sector job creates about 2.17 other jobs. Personal incomes increase by 8% in counties with at least one unconventional oil or gas well. The resource boom translates into an overall increase in employment by between 500,000 - 600,000 jobs. A key observation is that, despite rising labour costs, there is no Dutch disease contraction in the tradable goods sector, while the non-tradable goods sector contracts. [He reconciles] this finding by providing evidence that the resource boom may give rise to local comparative advantage, through locally lower energy cost. This allows a clean separation of the energy price effect distinct from the local resource extraction effects.

Update 25/08/2014: new webapp of the paper here

The effect of the Bakken oil boom in the region

National Geographic reports: Bakken Oil Boom Brings Growing Pains to Small Montana Town An influx of workers leaves housing scarce—and the jail full.

OxCarre's Brock Smith and Alex James presented preliminary work on a related issue recently at the OxCarre Conference. Expect more soon!

FT: NATO's Rasmussen: "Russia backs anti-fracking groups in Europe to maintain market power"

FT: Russian intelligence agencies are covertly funding and working with European environmental groups to campaign against fracking and maintain EU dependence on Russian gas, the head of Nato has claimed.
The leader of the self-proclaimed state of Donesks was an anti-fracking campaigner in a previous career, and has now banned it, despite an ongoing project of Royal Dutch Shell. The article gives further allegations without hard evidence for Russian influence in Romania and Bulgaria in the support of anti-fracking groups.

Iraq, oil markets, and the US economy

Econbrowser:  Although the consequences for Iraqi oil production of what has happened so far appear to be minimal, all this comes at a time when the earlier and still ongoing conflicts in Libya and Syria have already disrupted nearly 2 mb/d in world oil production. If Iraq’s recent 3 mb/d was also taken out, we would be talking about a significant disruption in world oil supplies, and likely an oil price in excess of $150 a barrel...

FT: How will Mozambique handle its new gas wealth? Mozambique is one of the world's poorest countries, but the discovery of gas reserves off its coast could change that. Can it avoid the "commodities curse"?

Climate Change, Green Growth and Aid Allocation to Poor Countries

CSAE WP: With serious impacts of climate change looming in a few decades, but current poverty still high in the developing world, we ask how to spend development aid earmarked for the poor. Poverty reduction tends to be strongly linked to economic growth, but growth impacts the environment and increases CO2 emissions. So can greener growth that is more climate-resilient and less environmentally damaging deliver large scale poverty reduction? Can aid be used for effective poverty reduction now without affecting carbon emissions substantially? We argue that there are bound to be tradeoffs between emissions reductions and a greener growth on the one hand, and growth that is most effective in poverty reduction. We argue that development aid, earmarked for the poorest countries, should only selectively pay attention to climate change, and remain focused on fighting current poverty reduction, including via economic growth, not least as future resilience of these countries and their population will depend on their ability to create wealth and build up human capital now. The only use for development aid within the poorest countries for explicit climate-related investment ought to be when the investments also contribute to poverty reduction now, including for increasing resilience to current impacts of environmental shocks, or when the investments done now have serious intertemporal ‘lock-in’ problems so that they have implications also for when climate change bites by 2050. In our conclusions, we offer a series of concrete principles to judge development spending.

OxCarre Conference: Natural Resources and Instability

It starts tomorrow! Programme here!

Managing the revenue from natural resources—what’s a Finance Minister to do?

IMF: The Finance Minister answers her mobile. On the line is the Minister of Energy, who informs her that the country has struck oil and that he expects revenues from its sale to start flowing into the budget in the coming four years. While excited by the prospects of higher revenues—indeed the average resource-rich country gets more than 15 percent of GDP in resource revenues—she starts to ponder how to use these revenues for her country’s development. She is aware that only in rare cases have natural resources served as a catalyst for development; too often they have led to economic instability, corruption, and conflict or what has been termed as “the resource curse.”

Natural Resource Charter Conference Live

Natural#Resource #Charter2014 conference with @NRGInstitute. Live webstream!

A carbon tax could have achieved Obama's new climate goals and raised $24 billion a year

Vox: One frustrating aspect of America's seemingly endemic congressional dysfunction is that we end up with policy results that are worse from all points of view than could be achieve with a more constructive legislature.

Readings for the weekend

From the latest Oxford Economic Papers:

• Mineral resources and conflicts in DRC: a case of ecological fallacy?
• Democratizing for peace? The effect of democratization on civil conflicts
• Disasters and development: natural disasters, credit constraints, and economic growth

Five More Ways to Fight Global Warming

Bloomberg View: 

• establish an office for cheaply transferring the benefits of US government-funded fracking and solar research to Chinese companies
• Pay China to implement these technologies
• Tax carbon-intensive imports
• Increase research funding for solar technology in the US 
• Implement a carbon tax or equivalent here in the US

Readings for the week

• Economic Journal (forth.): The Economic Aftermath of Resource Booms: Evidence from Boomtowns in the American West
• Resources Policy: Has Bolivia׳s 2006–12 gas policy been useful to combat the resource curse?
• Institute for International Economics: Confronting the Curse: The Economics and Geopolotics of Natural Resource Governance
• Journal of Comparative Economics: Income Growth, Ethnic Polarization, and Political Risk: Evidence from International Oil Price Shocks
• Environmental and Resource Economics: Trade and renewable resources in a second best world

Inferring fossil-fuel subsidies from patterns in emission intensities

VoxEU: No comprehensive database of directly measured fossil-fuel subsidies exists at the international or the sub-national level, yet subsidies may be crucial drivers of global carbon emissions. This column describes a novel method for inferring carbon subsidies by examining country-specific patterns in carbon emission-to-output ratios, known as emission intensities. Calculations for 155 nations from 1980-2005 reveal that fossil-fuel price distortions are enormous, increasing, and often hidden. These subsidies contributed importantly to increasing emissions and lower growth.

Tax policies in resource rich economies

VoxEU: Resource-rich countries face a peculiar set of challenges; natural wealth can be both a blessing and a curse. This column looks at links between natural resource revenues and other taxes. Results suggest that these countries tend to substitute domestic taxes with natural-resource-based revenue; 30 cents in non-resource tax revenue are lost with each dollar of resource revenue. Worryingly, the substitution occurs disproportionately for growth-friendly taxes.

The Dutch Disease in Reverse: Iceland’s Natural Experiment

OxCarre WP: Abundant natural resources brought Iceland a systemically overvalued currency, with adverse
effects on the secondary tradable sector. During 2003-2008 another national treasure, the sovereign’s AAA rating, was used to attract foreign capital, elevating the real exchange rate even further. The financial collapse in 2008 left the country with a large foreign debt without the possibility of rollovers in international capital markets. This offset some of the effect of the natural resources on the real exchange rate; in effect, this was the Dutch disease in reverse as witnessed, in particular, by a massive increase in the number of tourists in recent years.

Bribes, Favors, and a Billion-Dollar Yacht: Inside the Crazy World of the Men Who Do Oil Companies' Dirty Work

Mother Jones: When big oil companies like Exxon-Mobil and Chevron set their sights on a prime new oil reserve in Africa, Asia, or the Middle East, the first phone call they make usually isn't to the government office putting it up for sale. Instead, they ring up one of their contacts in a small, elite group of so-called "fixers," a shady cabal of a few dozen well-connected billionaires who hold the strings on the market for the world's most valuable commodity. The fixer gets a fat fee and a straightforward assignment: Do whatever you need to do to get us those oil rights.

Resource Concentration and Civil Wars

NBER WP: This paper highlights the importance of natural resource concentration and ethnic group regional concentration for ethnic conflict. A new type of bargaining failure due to multiple types of potential conflicts (and hence multiple threat points) is identified. The theory predicts war to be more likely when resource and group concentration are high, and the empirical analysis, both at the country level and at the ethnic group level, confirms the essential role of geographic concentration variables for civil war.

Limit-Pricing and the (Un)Effectiveness of the Carbon Tax

OxCarre WP: All existing studies on the design of the optimal carbon tax assume that such instrument can effectively curb current carbon emissions. Yet as this paper argues, the effectiveness of a carbon tax is very limited when limit pricing arises on the oil market. Demand for energy, for fossil fuels like oil in particular, is notoriously very price inelastic, even in the long run. Facing such demand, an extractive cartel may increase its profits with higher prices, as long as those prices do not destroy its demand. The demand for oil features kinks, each corresponding to the entry price of one competing substitute. Some substitutes may be tolerated by an oil-extracting cartel (e.g. other fuels, including existing biofuels, solar and wind sources of energy...). However, when a substitution possibility has the potential to drastically deteriorate its market share, the cartel maximizes its profits by inducing the “limit price” that deters its entry. Limitpricing equilibria of non-renewable resource markets sharply differ from the conventional Hotelling outcome; for instance, taxes on the cartel’s resource become neutral regardless of their dynamics. Environmental policies may still reduce current extraction quantities when limit pricing occurs. For that, policies must support the production of existing substitutes, i.e. those not deterred by the cartel’s pricing. Unlike it, a carbon tax may increase current oil extraction: while its direct application to the oil (carbon) resource may be neutral, its application to oil’s (carbon) substitutes induces higher oil production.

Optimal environmental policy, public goods and labor markets over the business cycle

OxCarre WP: This paper studies the design of optimal fiscal policy in a real business cycle model with distortionary taxes and a climate change externality. Governments face the dual task of internalizing environmental externalities and raising revenues to finance the provision of public goods, including public capital. At their disposal governments have access to two tax instruments: tax on emissions and labor tax. We fi nd that a tax on labor is an e fficient instrument to finance public spending and facilitate the adjustment of the economy to the temporary improvement in productivity. Therefore, labor tax is cut in the model. Tax on emissions follows a distinct pattern depending on whether the potential economic expansion in response to a positive productivity shock is strong or weak: it is procyclical in the model that features public capital and is countercyclical in the models with public consumption only. The model implies that by restraining or boosting expansion in the short-run, the optimal carbon tax policy can help policymakers reconcile short-term concerns over economic growth with longer-term risks from climate change. The welfare gains from such short-run policies are non-negligible and can amount to USD 121.9 bn or 0.7% of the US GDP.

Oil in South Sudan

IGC WP: Based on new research on oil exploration in developing countries, this note makes the simple but significant point that favourable geology may not alone be enough for South Sudan to induce additional oil exploration, investments and production. The institutions and policies put in place by the government are likely to make a difference for the exploration activities and therefore also the likelihood of discovering new oil reserves. Furthermore, the institutions and policies put in place are also likely to matter for the recovery rates of proven reserves.

Oil and Gas Outlook by The Times' Raconteur

Outlook here. Check page 8 for an OxCarre expert's view on avoiding the resource curse.

Dictators Walking the Mogadishu Line

OxCarre WP: History offers many examples of dictators who worsened their behavior signi…ficantly over time (like Zimbabwe’s Robert Mugabe), while there are also cases of dictators who have displayed remarkable improvements (like Jerry Rawlings of Ghana). We show that such mutations can result from rational behavior when the dictator’s fl‡ow use of repression is complementary to his accumulated stock of wrongdoings. This complementarity gives rise to two steady states (one where repression is low and one where repression is high) and implies that any individual rising to power in this setup has the potential to end up as either a moderate leader, or as a dreaded tyrant. Our model shows that dictators are more likely to derail with higher levels of divertible funds available, for example stemming from fungible aid infl‡ows or from the exploitation of natural resources.

Film exposes shady oil deals in Congo's Virunga National Park

Trust.org: When British filmmaker Orlando von Einsiedel set off to eastern Congo to start filming a documentary about Virunga National Park, he wanted to tell a positive story of rangers saving endangered mountain gorillas from poachers. Little did he know that his film about the park would become an exposé of the corrupt ways of an international oil company that had set its sight on the park, a UNESCO World Heritage site...

Greening Economics: It is time

VoxEU: The concept of environmental capital is throughly entrenched in policy dicussions but largely missing from mainstream economic curriculums. This column argues environmental externalities, climate change, and constraints on natural resources will constantly and deeply affect humankind’s future. The teaching of economics, especially growth economics, should stop ignoring them.

The World's Resources Aren't Running Out

Matt Ridley in the WSJ: How many times have you heard that we humans are "using up" the world's resources, "running out" of oil, "reaching the limits" of the atmosphere's capacity to cope with pollution or "approaching the carrying capacity" of the land's ability to support a greater population? The assumption behind all such statements is that there is a fixed amount of stuff—metals, oil, clean air, land—and that we risk exhausting it through our consumption...

What East Africa Can Learn From Past Booms

Foreign Affairs: East Africa is the global oil and gas industry’s hottest frontier. Barely a month goes by, it seems, without a major discovery in Mozambique, Tanzania, Uganda, or the eastern Democratic Republic of the Congo... Whatever system for distributing oil profits is established by then will define these states -- and the prospects of their people -- for generations to come.

Climate policy targets revisited

Tol on VoxEU: The IPCC’s Fifth Assessment Report estimates lower costs of climate change and higher costs of abatement than the Stern Review. However, current UN negotiations focus on stabilising atmospheric concentrations of greenhouse gases at even lower levels than recommended by Stern. This column argues that, given realistic estimates of the rate at which people discount the future, the UN’s target is probably too stringent. Moreover, since real-world climate policy is far from the ideal of a uniform carbon price, the costs of emission reduction are likely to be much higher than the IPCC’s estimates.

What have we learned about the resource curse?

Michael Ross: Since 2001, hundreds of academic studies have examined the “resource curse,” meaning the claim that natural resource wealth tends to perversely affect a country’s governance. There is now robust evidence that one type of mineral wealth, petroleum, has at least three harmful effects: it tends to make authoritarian regimes more durable, to increase certain types of corruption, and to help trigger violent conflict in low and middle income countries. Scholars have also made progress toward understanding the mechanisms that lead to these outcomes, and the conditions that make them more likely. This essay reviews the evidence behind these claims, the debates over their validity, and some of the unresolved puzzles for future research.

Limit-Pricing and the (Un) Effectiveness of the Carbon Tax

WP: All existing studies on the design of the optimal carbon tax assume that such instrument can generally curb current carbon emissions. Yet this paper shows that the effectiveness of a carbon tax is limited when limit pricing arises on the market for carbon resources. Demand for energy, for fossil fuels in particular, is notoriously very price inelastic, even in the long run. Facing such demand, an extractive cartel may increase its profits with higher prices, as long as those prices do not warrant the profitability of competing substitutes.
Thus the demand for fossil fuels features kinks, each corresponding to the entry price of one substitute. When the entry of a competing substitute may sufficiently deteriorate its market share, the cartel maximizes its profits by inducing the “limit price” that deters the substitute’s production. Limit-pricing equilibria of non-renewable resource markets sharply differ from the conventional Hotelling outcome; for instance, most resource taxes become neutral irrespective of their dynamics. For policies to effectively curb extraction quantities, they must rely on instruments applied on substitutes to fossil fuels.

Colonial Institutions, Commodity Booms, and the Diffusion of Elementary Education in Brazil

NBER WP: We explain how the decentralization of fiscal responsibility among Brazilian states between 1889 and 1930 promoted a unequal expansion in public schooling. We document how the variation in state export tax revenues, product of commodity booms, explains increases in expenditures on education, literacy, and schools per children. Yet we also find that such improvements did not take place in states that either had more slaves before abolition or cultivated cotton during colonial times. Beyond path-dependence, ours story emphasizes the interaction between colonial institutions and subsequent fiscal changes to explain radical changes in the ranking of states which persists until today.

Inferring Fossil-Fuel Subsidies from Patterns in Emission Intensities

OxCarre WP: I develop a unique database of international fossil-fuel subsidies by examining country specific
patterns in carbon emission-to-GDP ratios, known as emission-intensities. For most but not all countries, intensities tend to be hump-shaped with income. I construct a model of structural-transformation that generates this hump-shaped intensity and then show that deviations from this pattern must be driven by distortions to sectoral-productivity and/or fossil-fuel prices. Finally, I use the calibrated model to measure these distortions for 170 countries for 1980-2010. This methodology reveals that fossil-fuel price-distortions are large, increasing and often hidden. Furthermore, they are major contributors to higher carbon emissions and lower GDP.