Fiscal policy in oil and gas-exporting economies: Good times, bad times and ugly times
with Olivier Durand-Lasserve
Abstract
We study the cyclicality of fiscal policy to oil and gas revenue in emerging and developing energy-exporting countries. We build a unique oil and gas fiscal revenue database for 30 countries and develop a novel framework to identify various kinds of asymmetry in the response of public expenditure to oil and gas revenue. To explore asymmetries that may occur during revenue cycles, we distinguish between high and low oil and gas revenue regimes, as well as between positive and negative revenue shocks. Using an unbalanced panel over the period 2000–2020, we find that fiscal policy is procyclical in general but neutral when confronted with high but declining revenue, possibly influenced by policymakers’ optimistic view that revenue will quickly recover. Moreover, we find the greatest level of procyclicality when revenue is low but increasing. This situation may follow periods of fiscal tightening where governments face greater social pressure to catch up with higher spending. Our results also suggest that financial openness increases procyclicality in low revenue regimes only, and that during these periods, IMF programs are associated with expenditure reductions regardless of improvements or deteriorations of oil and gas revenue.
The energy transition and export diversification in oil-dependent countries: The role of structural factors
with Luc Désiré Omgba
Abstract
The energy transition toward decarbonization is expected to impact producers of fossil fuels. However, oil-exporting countries are currently key players in the modern economy. Thus, the energy transition will not be successful if state revenues in these countries are not stably maintained. These countries can protect themselves against revenue volatility and mitigate carbon risk by diversifying their economies. However, export diversification appears to be particularly challenging for many oil-producing countries. It is natural to ask why some oil-exporting countries have managed to diversify their economies whereas others have not. We hypothesize that the differences in oil producers’ diversification patterns may be associated with differences in their structural characteristics. Such differences may cause countries’ diversification trends to diverge. To investigate this hypothesis, we examine whether all countries converge toward the same diversification level. We also check whether their diversification efforts diverge overall but create separate convergence clubs. The results show that structural and institutional factors play a central role in the diversification process. In particular, countries with higher quality infrastructure, human capital and research and development efforts are more likely to converge toward high diversification. Thus, these factors provide greater economic stability in turbulent times and promote a successful energy transition.
The Opportunity Cost of Domestic Oil Consumption for an Oil Exporter: Illustration for Saudi Arabia
with Axel Pierru
Abstract
We develop a partial equilibrium framework to assess the opportunity cost of domestic oil consumption for an oil-exporting country. We show that the opportunity cost depends on various factors, including the constraints to which the oil producer is subject and the domestic oil pricing scheme. Moreover, through an application of the envelope theorem, we assess net welfare gains that can be generated from a reform of the domestic oil price. Our results show that the most efficient pricing policy is to set the domestic price equal to the opportunity cost. A numerical illustration for Saudi Arabia is provided to demonstrate the practical value of the proposed framework. Our findings can inform public decision-making for projects and policies that impact oil demand.