Middle East and North Africa
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energy markets are subject to technological change which entails both risks and
opportunities for fossil fuel dependent economies
top-down diversification policies haven’t worked, need for a policy shift emphasizing
transformation (behavioral change with a focus on internal as opposed to external
embracing the “letter and spirit” of modern corporate governance could bring about
transformation through both enhanced transparency and efficiency
NARROW VS. BROAD VIEW OF ECONOMIC/ENERGY CYCLES
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2 (somewhat orthogonal) views:
•“narrow” view: emphasizing “short term” factors. relatively small shocks can have large effects
(under the assumption of inelastic S & D in the short run. e.g. Kilian (AER 2009))
•“broad” view: emphasizing “medium run” factors specifically technological change
dates at least it back to Kondratiev and Schumpeter (creative destruction theory)
medium term business cycle literature. (Gertler and Comin, AER 2005) and endogenous
technological adoption (Anzoategui et al. NBER WP 2016)
market size effect on entry and innovation (e.g. Acemoglu et al. QJE 2004)
RETHINKING THE 2014 OIL PRICE COLLAPSE
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Most studies thus far have emphasized supply factors (e.g. Arezki and Blanchard, 2014) as a dominant
factors arguing the drop will have net positive impact on the global economy (Obstfeld, Arezki and Milesi
But is it really a “pure supply” shock? Need to step back a little and take broad view:
1. expansion of the Chinese economy
2. “market size effect” stimulating entry and R&D spending toward “process innovation”
3. (Knightian) uncertainty (coupled with gradual learning) over whether or not R&D will pan out
4. when the market & strategic players (OPEC) realize the innovation will pan out (fracking but also 3D
imaging), two effects:
i. (persistent) feedback effect on oil prices through expectational channels (“ballooning recoverable oil
ii. strategic response by OPEC (reinforced i. in 2014 unlike in 1985)
LOW FOR LONG
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Sources: World Bank, International Monetary Fund (IMF) and Economist Intelligence Unit (EIU), Commodity prices reports.
Note: f stands for forecast.
OIL PRICES AND R&D SPENDING COMOVE
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INNOVATING “AWAY” FROM OIL
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78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12
Clean vs Dirty Patents
Dirty Patents Clean Patents Ratio: Clean vs Dirty
Source:Aghion,Dechezlepretre,Hemous,Martin and Van Reenen (2012), calculations based on the
RISKS AND OPPORTUNITIES STEMMING FROM TECHNOLOGICAL CHANGE
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intensive margin : low for long oil prices (from surpluses to deficits)
extensive margin: stranded oil (existential threat to concentrated economies)
Intensive margin: efficiency gains (rationalization following oil price drop which allowed sustained
production at lower cost)
extensive margin: new industries (e.g. solar potential: 6h of deserts’ solar irradiation amount to the
world’s demand for a year)
Post Paris COP21: NDCs/carbon budgets entail to keep only 1/3 of oil (Canada, Arctic). Reserves
unburnt: 50% of gas & 80% of coal (mainly China, Russia, US).
Reserves 3x the carbon budget. In the Middle East 260 billion barrels of oil cannot be burnt (30%
of oil reserves). McGlade and Ekins (2015, Nature)
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TRANSFORMATION AND ATTITUDES TOWARD INNOVATION
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Traditional approach: Top-down diversification (picking winners often with a focus on external factors
i.e. macro and regulation)
New approach: transformation aiming at “behavioral change”
Attitudes toward innovation shape the exposure of firms/countries/citizens to market
disruptions (the latter originating from technological change). Resource rich countries tend
to innovate very little everything else being equal.
Resource “endowment’ interact with policies/institutional arrangements
=>here the focus on “within (large/SOEs) firm” transformation as opposed to “outside
the firm environment” (contestability…)
ATTITUDES TOWARD “INNOVATION”
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Source: Hofstede Insights
INNOVATION AND RESOURCE DEPENDENCE
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Source: World Development Indicators, World Bank
NECESSITY AS THE MOTHER OF TRANSFORMATION
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necessity is the mother of invention (Hanlon, Ectra 2015). Soft vs. strict budget constraints for
firms (SOEs typically on the soft side) and individuals/gvts (oil rents => patronage spending to
quell masses). Make or break moment for rigid systems.
Ownership (and organizational structure) matter. State owned enterprise vs. private corporation
(privately owned or publicly listed). SOEs typically not transparent and less innovative but changing
with Petrobas and China oil companies which have conducted IPOs….
Delegation to managers. Separate control from management. More generally empowered
managers are key for development. Many countries in MNA have criminalized business mistake
especially for top executive in SOEs.
=> embracing “letter and spirit” of modern corporate governance (a function of ownership &
organizational structure and manager empowerment) is key to achieving transparency &
TRANSFORMATION: FROM “OIL TO ENERGY” CORPORATIONS
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The coming shift in big state oil?
ARAMCO announcement over a 5 percent IPO
1. SOEs: multiple objectives accompanied by soft budget constraints. Many SOEs sits on the largest and cheapest to extract
reserves but many are heavily indebted (e.g. Venezuela). Status quo not sustainable: risks going from stranded oil to stranded
2. Publicly listed firms (also to a lesser extent privately owned firms): more transparency, more diffused ownership and a hard
budget constraint. Lead to more accountability (to share holders), better performance and more innovation. (Gilfe et al. 2016
JF). e.g. able to significantly increase efficiency after the collapse in oil prices and continue producing at lower prices.
Can the IPO help and spillover to the rest of the economy? How should they be structured?
Transparency: where you list matter? Disclosure rules (contrast to private placement) in the stock exchange where the stock is
(cross) listed. Tying your hands/commitment device. Pecking order of where one should list. NY>London>HK>Japan? Dodd-Frank
& EU regulations on disclosure rules for extractives>EITI (voluntary basis).
Innovation: patent typically increase significantly after IPOs. Acharya et. al (forthcoming JF). R&D significantly increased in
China oil sector after series of IPOs. Access to cheap oil reserves by major Western corporations is limited and influenced the
direction of technological change (away from oil). The latter have become energy as opposed to exclusively oil corporations.
If they were to regain some access together with the improvement of corporate governance of SOEs we may witness a move
toward clean(er) oil?
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