Question

“Michael Ross and Mary Ann Tetreault argue that oil and other natural resources with abundant supply in some countries have negative economic and political impacts

.” a. Explain how this abundance translates into a curse.

b. Cite and elaborate on three different examples from oil-exporting countries in the Middle East.

c. Explain how the recent changes in oil prices demonstrate how vulnerable rentier states are to worldwide changes.

800 words required

Answer 1

a. Explain how this abundance translates into a curse ?

Many countries depend on oil exports, the less cooperative they become: they grow less likely to join intergovernmental organizations, to accept the compulsory jurisdiction of international judicial bodies, and to agree to binding arbitration for investment disputes. This pattern is robust to the use of country and year fixed effects, to alternative measures of the key variables, and to the exclusion of all countries in the Middle East. To explain this pattern, we consider the economic incentives that foster participation in international institutions: the desire to attract foreign investment and to gain access to foreign markets. Oil-exporting states, we argue, find it relatively easy to achieve these aims without making costly commitments to international institutions. In other words, natural resource wealth liberates states from the economic pressures that would otherwise drive them toward cooperation.

Cite and elaborate on three different examples from oil-exporting countries in the Middle East?

Russia has been a prominent victim of the plunging prices as one of the worlds's largest oil producers.

About half of Russia's budget revenues currently come from the energy exports and which is unbelivable.

The ruble (Currency) was under pressure from economic sanctions that the West imposed on Russia for its involvement in the Ukraine conflict.

Saudi Arabia's income from oil fell by 23% last year, highly significant in an economy where around 73% of total revenues comes from the industry.

After the lifting of sanctions on Iran, share prices in oil-rich Gulf states dropped sharply - with the Saudi Arabia Stock Exchange falling 5.4%.

With Saudi Arabia's regional rival, Iran, entering the international market, experts say the kingdom is unlikely to back any efforts by the Organization of the Petroleum Exporting Countries to reduce production and increase oil prices.

Venezuela has the world's biggest known oil reserves, and oil exports account for as much as 95% of the country's revenues.However, the huge fall in oil prices in the past few months has slashed revenues by 60%.

Venezuela's government announced a 60-day economic emergency to deal with a worsening economic crisis. The edict includes tax increases and puts emergency measures in place to pay for welfare services and food imports.

Explain how the recent changes in oil prices demonstrate how vulnerable rentier states are to worldwide changes?

The repercussions of oil shocks for oil-exporting economies are less clear, since rising oil prices imply higher oil export revenues in an inelastic market. Further, countries that export non-oil forms of energy could be affected by oil disturbances in a different way. Since the prices of alternative sources of energy typically rise with the price of crude oil due to substitution, oil-importing countries that produce and export other forms of energy could potentially benefit from soaring oil prices through an increased demand for their oil substitutes The cause of the oil price increase matters for the dynamic effects across countries. Within a structural vector autoregression (SVAR) framework, a distinction is made between exogenous disruptions to oil supply, oil demand shocks driven by a thriving global economy, and oil-specific demand shocks, which could be the result of speculative activities or precautionary buying. After an unfavourable oil supply shock, oil- and energy-importing economies face a permanent fall in economic activity, while the impact is insignificant or even positive in net energy-exporting economies. Inflationary effects are also smaller in the latter group, which can be explained by an appreciation of their exchange rates. On the other hand, the dynamic effects of oil demand shocks driven by global economic activity and oil-specific demand shocks turn out to be much more similar across countries.Direct effects on the general price level through rising energy prices are expected at short horizons because energy prices are a component of the consumer price index. However, additional inflationary effects may arise as higher energy input costs or higher wage demands feed through to consumer prices. These indirect effects are more delayed than the direct effects and can thus be influenced by the monetary policy reaction. For this reason, it is crucial for a forward-looking central bank to understand the transmission of oil shocks to inflation so that it can implement appropriate policy.The direct effects of rising energy prices on consumer prices are significant for all economies, whereas additional indirect effects vary substantially, particularly the second-round effects. The latter are sizeable in the euro area and Switzerland, mild in Japan and absent in the United States. As a consequence, the speed and magnitude of the passthrough to consumer prices are also very different for these economies.

Oil market developments are transmitted to the macroeconomy is key to determining the appropriate policy reaction in response to oil shocks. First, the magnitude of the final effects on inflation and output depends on which channels are operative as well as on their relative strengths. Second, the timing of the impact is also important for policy decisions. Given that monetary policy actions affect headline inflation only with a lag, direct effects of rising energy prices are unavoidable. However, if the initial shock to relative energy prices also creates indirect effects by feeding into the price of non-energy goods and services over longer horizons, there is a stabilisation role for central banks.oil supply shocks are the single most important driving force behind oil price fluctuations. Furthermore, it is not straightforward to determine the precise transmission channels of oil price shifts driven by global economic activity since they could be correlated with domestic shocks, such as shocks to productivity or trade, which makes the interpretation difficult. This carries over to oil-specific demand shocks, after which the inflationary consequences are only significantly positive in Australia and the United States.