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.