Oil and Autocracy: A Quantitative Analysis With Policy Recommendations

March 3, 2011

Swiss Global Economics

• 30% of the ultimately recoverable oil resources has been used

• Estimate of ultimately recoverable conventional Oil resources: 3.5-4 trillion barrels

• Estimate of unconventional Oil supplies: 6 trillion barrels

• 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.

• The average world Oil decline rate is 5.1%.

• The Larger The Oil field the slower the decline rate

• The World will need to increase Oil reserves by 5.5 million barrels per day per year to offset decline rate 2010-2030

• By 2030, 25% of OPEC’s NGL production will be liquids produced from natural gas

• 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

The Global Context: Looking ahead to 2030

The World may be running out of cheap Oil

The World may be running out of cheap Oil

Ghowar= 0.3% N-Sea= 11.3%

Emerging economies continue to drive energy demandWORLDWIDE 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 revenuesRefinery strives to produce mix of products that will maximize its revenues

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.

Petropolitics In The Middle East

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

• 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 non-linearities, 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

• 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.

Main Intuitions

• 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.

Policy recommendations: Adapting To realities