Transcript A quantitative analysis with policy

Swiss Global Economics
Oil and Autocracy: A Quantitative Analysis With Policy Recommendations
March 3, 2011
The Global Context: Looking ahead to 2030
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The World may be
running out of cheap
30% of the ultimately recoverable oil resources has been used
Oil
Estimate of ultimately recoverable conventional Oil resources: 3.5-4 trillion barrels
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Estimate of unconventional Oil supplies: 6 trillion barrels
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British Petroleum estimates that there are 4.5 trillion barrels of Oil recoverable at a price of
$90/bbl(2006$)
Four times the total Consumption expected over the next 25 years.
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The average world Oil decline rate is 5.1%.
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The Larger The Oil field the slower the decline rate
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The World will need to increase Oil reserves by 5.5 million barrels per day per year to offset decline rate
2010-2030
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By 2030, 25% of OPEC’s NGL production will be liquids produced from natural gas
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80% of NGL productions will be in the Middlle East and cost will be approximately $80 per barrel of
diesel.
Natural Gas demand is projected to grow at a rate 35% faster than in the US(2002-2030)
Net imports will increase 233bcm to 639bcm imports will equal 81% of European demand by 2030
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Ghowar= 0.3%
N-Sea= 11.3%
Emerging economies continue to drive energy demand
WORLDWIDE demand for primary energy will increase by 36% between 2008 and 2035, according to the International Energy Agency’s latest
forecasts. Emerging economies will account for almost all of this of this increase (93%). China, which overtook America last year to become the
world’s largest energy user, is projected to increase its demand by 75% over the same period. On the supply-side, the IEA expects that between
2009 and 2025 China will increase its installed capacity by the equivalent of America’s entire installed capacity in 2008. Fossil fuels will still be
the dominant source of energy in 2035, though their share in the energy mix will fall in favour of renewable energy sources and nuclear power.
Refinery strives to produce mix of
products that will maximize its revenues
Petropolitics In The Middle East
Market Update and Dynamics
• The unrest sweeping across major oil producing countries is causing a short-term market
reaction leading to a price spike to oil.
• The underlying trend of a world that is increasingly reliant on oil supplies from authoritarian
countries, is making the global oil market more vulnerable threatening a fragile global
economic recovery.
• The contours of the Oil market is dedicated by the intermingling of two factors: the rising
demand led by the rapidly emerging economies of East Asia and the declining production in
the North Sea as Alaska, as old fields mature.
• The corollary is an increasing trade for oil that goes in tandem with the rely of the US,
Europe, Japan, China and India on importing oil to meet their needs.
• Today more than 40 million b/d is traded internationally and that proportion is increasing
exponentially.
• Only a limited list of countries sharing the common characteristics of latent instability, large
populations aged under 25, high unemployment, and extreme income inequality are able to
maintain or increase exports.
• Relying of supplies from potentially unstable countries risk triggering a vicious economic
cycle: when supplies are concentrated and trade is growing, any disruption will trigger fear
and speculation, feeding through the economy through price instability and inflation.
The Price Of Freedom
The complex economic effects from an oil shock:
 Transfers income from consumers to
producers.
 Lowers overall spending, as consumers
normally cut their spending more quickly than
producers increase theirs.
 Shifts spending away from other goods and
services.
 Net oil exporting countries become richer and
net oil importers.
 Lowers both the real wages and the
profitability of energy-using industries.
 Reduces Supply as capacity becomes
uneconomic.
Petropolitics: The conventional wisdom
The causal relationship between natural resources and
authoritarianism is reported as a robust fact in:
The scholarly literature on comparative political systems
(e.g., Huntington 1991).
Policy papers written by researchers at multilateral aid
organizations (e.g., Harford and Klein 2005).
Popular books on world politics and economics (e.g.,
Friedman 2007, Collier 2008).
The mass media (e.g., Friedman 2006, Rosenberg 2007).
Friedman’s first law of petropolitics
Regression analysis
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The resource curse is about a dynamic, time-series process, but the
econometric techniques that have been used to test it are primarily static,
centered on cross-sectional variance, and are estimated on data sets that are
truncated with respect to time.
You have to assume that these regressions estimate the independent effect of
resources on democracy without bias: that all the factors that might jointly
determine natural resource reliance and political regime have been held
constant.
You have to further assume that the regressions fully capture these variables’
trajectories — in explaining the variance in levels across countries, the
regressions assume that the actual adjustment process that drives
democratization to new levels due to changes in resource reliance can be
ignored without biasing the estimates.
Finally, you have to assume that the regressions properly model possible nonlinearities, be they threshold effects or conditional relationships. Dunning (2008)
is a partial exception and a real step in the right direction on this count.
Petropolitics: The Curse
The oil curse is a theory about change over
time. It posits that had it not been for
the discovery of oil, a “cursed” country
would have gone down a different path
of institutional development.
H1: Oil undermines democracies
H2: Oil prevents
democratic transitions
H3: Oil delays or slows
democratic transitions
Some countries
democratized during resource booms
Even Arab countries …
And more than one Arab country …
The results are econometrically robust,
Nor was Saudi Arabia a
democratic paradise before oil
Main Intuitions
• Regime types are not determined by natural resource wealth. This is not to say that
there may not be cases where a dictator has held onto power by using resource
wealth. It is to say that the evidence does not support generalizable, law like
statements.
• History without a license is a dangerous thing. There are a host of issues in political
economy about processes that take place over time within countries that have been
addressed using pooled regression techniques on longitudinally truncated data sets —
such as the rise of the welfare state, the centralization of taxation, the onset of civil
war, and industrialization — not to mention the other hypotheses of the resource
curse. We would suggest that they might more appropriately be addressed using time
series data and methods.
Policy recommendations: Adapting To realities
• Diversify the portfolio of mixed fuels resources used to generate electricity.
• Increase the reserve supplies at every level of the energy supply chain as a cushion to
soften blows to supply pattern, deter against speculation and avoid price swings.
• Widen the diversity of supply by subsidizing the development of renewable sources
of energy, and a new generation of nuclear power stations.