Expropriations of foreign-owned oil assets more likely with high oil prices and weak political institutions

Sergei Guriev, Konstantin Sonin, Anton Kolotilin, Tue, 03/25/2008

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In recent years we have witnessed a phenomenon that has not been observed since the 1970s: the forced nationalization of major, foreign-owned oil assets in Venezuela, Bolivia, Russia and Kazakhstan. Due to economies of scale and better human capital, multinational oil companies have been more efficient and expropriations often give rise to losses of output and national income. In Mexico in 1938 and in Iran in 1951 expropriations not only resulted in a decline on the growth rates, but were also followed by a decline in output and wages in the industry. Another striking example is Saudi Arabia, one of the leading oil-exporters in the world, where per capita GDP has been stagnating for 25 years, 1978-2003, and is now a half of what it used to be in the 1970s.

The authors of CEPR DP6755 study nationalizations in the oil industry around the world in 1960-2002 and show that governments are more likely to nationalize when oil prices are high and when political institutions are weak. Most expropriations took place in the 1970s, when oil prices were at historically high levels. Once prices came down in the 1980s and 1990s, the expropriations virtually disappeared and re-emerged only in the last decade when oil prices climbed back to the 170s levels.

It seems natural that the higher oil prices, the more valuable the oil assets and the stronger the incentives to expropriate. However, given the costs of expropriation, it is not immediately clear why a government would respond to a positive oil price shock with expropriation rather than just imposing higher taxes on oil companies’ rents and at the same time preserving their incentives for investment in new fields and cost-reducing technologies. This straightforward solution relies on the external enforcement of contracts, which is not the case as the government is both an enforcer and a contracting party. It cannot commit to abstaining from expropriation and the company cannot commit to paying high taxes. The only protection for the private company is the government’s desire to benefit from more efficient production in the future, and checks and balances within the government.

Summarised by CEPR staff

DP6755 Determinants of Expropriation in the Oil Sector: A Theory and Evidence from Panel Data

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URL:  http://www.cepr.org/pubs/new-dps/dplist.asp?dpno=6755.asp

Topics:  Energy

Tags:  property rights, nationalization, oil industry

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