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  • Oil and Economic Cooperation

    There is a common school of thought that a country like Russia can only go so far in antagonizing major economies. Russia has goods to export--not least of which is oil--and the U.S. and Europe are good places to sell those goods. So if Russia goes too far in Ukraine, for example, they run a big economic risk. At The Monkey Cage , Michael Ross and Erik Voeten find that the opposite may be true. When the good one country has is oil, then that country can actually be more brazen and get away with it. To measure cooperation we looked at a wide range of indicators –including the number of treaties that a country signs, the number of international organizations it joins and its willingness to abide by decisions made by international courts. The graph below shows the correlation in 2005 between per capita oil income and one of these indicators for cooperation: the KOF Index of political globalization, which represents the number of international organizations that countries have joined, the international treaties they have signed, the number of peacekeepers it contributes (per capita), and the number of embassies against the oil revenues per capita. We find that beyond a certain level of oil income (around $100 per capita) more oil wealth is correlated with sharply lower levels of political globalization. Strikingly, this pattern shows up when we compare oil-rich states to oil-poor states, and when we look at individual states over time, as their oil production rises and falls. The findings also hold when we control for possibly confounding factors, such as democracy, economic development, and regional effects. We find very similar effects when we use other indicators to measure the degree to which states are integrated into and cooperate with international institutions. Read How oil wealth can make Russia and other countries less cooperative here .
  • Harvard Business Review: 'Why Is Ukraine's Economy Such a Mess?'

    Harvard Business Review editor Justin Fox looked at growth in Ukraine since independence and compared it to neighboring, former Soviet bloc economies, and was surprised by how much it lagged: So he called up Chrystia Freeland , former FT correspondent and now member of Canadian Parliament. Freeland was in Ukraine when it became an independent nation, and, Fox notes, her mother helped "craft the country's constitution." Here is an excerpt from the interview: Fox: The East has this old industrial base. What does the Ukrainian economy consist of on the whole? Is it heavily agricultural? Freeland: The industrial base is important, particularly in eastern Ukraine. We all know about Ukraine as the breadbasket of Europe, and it is indeed an incredibly fertile country. There’s been a lot of Chinese investment in that part of the Ukrainian economy. There is also a technology outsourcing industry. And then finally, in some parts of Ukraine, tourism has been becoming more important. Why is the economy such a mess? Because of very bad, kleptocratic governments. That is 90% of the reason. In terms of the economy, Ukraine only accomplished maybe half of the things that you need to do, when the Soviet Union collapsed and they moved to a market economy. They did do privatization. There are now a lot of private companies, and there is a market. It’s important for us to remember that not so long ago even selling a pair of jeans was illegal. But what they failed to do was build an effective rule of law and government institutions. Corruption, in the Yanukovych era at least, was absolutely rampant. And some important reforms of state finances haven’t happened. In particular, energy prices are still subsidized. Of course, when you move to free-market prices that’s a huge shock to the society. But Ukraine’s failure to liberalize energy prices is part of the reason that it has this great dependency on Russia. Having said all of that, and having been in Kyiv* last week, I think there’s a bit of an Italian phenomenon going on, where you actually have a highly educated, very entrepreneurial population, but because you had this incredibly corrupt state, a lot of the Ukrainian economy has gone underground. Walking through the streets of many Ukrainian cities — Kyiv, Lviv in Western Ukraine, Dnipropetrovsk in the East — you feel yourself to be in a much more prosperous society than the official data reflect. The official data is incredible. Poland on the one side and Russia on the other are both in the low twenty-thousands in GDP per capita, and Ukraine is officially at $7,298. There is no doubt that Ukraine has fared much, much worse than Poland. That is a testament to how important government decisions are. These countries were not so far apart in 1991 when Ukraine became independent, and the Poles by and large have done the right things, and the Ukrainian government has not. Read the full interview here .
  • Crimea Crisis: The Economic Costs to Russia

    War is costly on all levels. And Russia's involvement in Ukraine is going to be costly economically, not only for all Ukrainians, but for the Russian economy. How costly? Very costly, argues Sergei Guriev , a professor of economics and former Rector at the New Economic School in Moscow who is currently a visiting professor at Sciences Po . At Project Syndicate Guriev writes "The economic damage to Russia will be vast." First, there are the direct costs of military operations and of supporting the Crimean regime and its woefully inefficient economy (which has been heavily subsidized by Ukraine’s government for years.) Given the uncertainty surrounding Crimea’s future status, these costs are difficult to estimate, though they are most likely to total several billion dollars per year. A direct cost of this magnitude amounts to less than 0.5% of Russia’s GDP. While not trivial, Russia can afford it. Russia just spent $50 billion dollars on the Sochi Olympics and plans to spend even more for the 2018 World Cup. It was prepared to lend $15 billion to former Ukrainian President Viktor Yanukovych’s government and to provide $8 billion annually in gas subsidies. Then there are the costs related to the impact of sanctions on trade and investment. Though the scope of the sanctions remains uncertain, the effect could be enormous. Annual inward foreign direct investment is estimated to have reached $80 billion in 2013. A significant decline in FDI – which brings not only money but also modern technology and managerial skills – would hit Russia’s long-term economic growth hard. And denying Russian banks and firms access to the US (and possibly European) banking system – the harshest sanction applied to Iran – would have a devastating impact. In the short run, however, it is trade that matters much more than investment. Russia’s annual exports (mostly oil, gas, and other commodities) are worth almost $600 billion, while annual imports total almost $500 billion. Any non-trivial trade sanctions (including sanctions on Russian financial institutions) would be much more painful than the direct cost of subsidizing Crimea. Of course, sanctions would hurt Russia’s trading partners, too. But Russia’s dependence on trade with the West is certainly much larger than vice versa. Moreover, the most important source of potential damage to Russia’s economy lies elsewhere. Russian and foreign businesses have always been worried about the unpredictability of the country’s political leadership. Lack of confidence in Russian policymaking is the main reason for capital flight, low domestic asset prices, declining investment, and an economic slowdown that the Crimea crisis will almost certainly cause to accelerate. Read Putin's Imperial Road to Ruin here .
  • Economist Intelligence Unit Projects These Five Economies Will See Fastest Growth in 2014

    Want your economy to be fast-growing in 2014? It doesn't hurt to have some sort of direct line to the world's most populous economy: China. A gas pipeline or shipping line for minerals will do. Or even a line of wealthy Chinese at your booming casinos. The Economist Intelligence Unit has put out its top five nations for projected growth in the coming year. Numbers 2 through 5 all have economies where growth is tied to China. #1's growth depends more on its ability to stabilize politically, but then it too depends greatly on China.
  • The Rise and Fall of Eike Batista, Brazil's Richest Man

    Eike Batista likes to play the role of the star. But he may be less than thrilled at what got him onto the cover of the latest issue of Businessweek . Batista built a bit of an oil and mineral empire to become the wealthiest man in Brazil. And then he lost it. Or at least a lot of it. And when "it," amounts to $34.5 billion, the loss is historic. Juan Pablo Spinetto , Peter Millard , and Ken Wells take us through the story of Batista's rise and fall. It’s a cloudy April afternoon in 2012, but Batista is full of blue skies and endless vistas. To date he’s founded five publicly traded companies and is soon to launch a sixth. His personal wealth is estimated at $34.5 billion; most of his enterprises are managed under the umbrella of a holding company bearing his initials, the EBX Group. At 55, he’s Brazil’s richest man—and the eighth-wealthiest man on earth. With him onstage is a roster of Brazil’s political and business elite: President Dilma Rousseff, Rio Governor Sérgio Cabral, and Mines and Energy Minister Edison Lobão. The audience of 400 includes foreign corporate luminaries such as Kim Jung Rae, co-chief executive officer of Hyundai Corp. Batista has gathered them to show off Açu, which he predicts will be the largest port in the Americas. He also wants to share some good news. His oil company, OGX Petróleo e Gás, has begun production on what he describes as a “new frontier” of petroleum 37 miles off the Brazilian coast. “This is an historical moment,” says Batista. “It’s the first time an independent Brazilian company has produced offshore oil.” That Batista, new to the oil business, had brought in wells gushing with crude was the sort of announcement investors had come to expect of him. At that moment, Batista embodied Brazil’s decade-long economic expansion, and for international investors wanting a piece of the new Brazil, he could do no wrong. Many of those investors were American. BlackRock (BLK), the world’s largest money manager, had bought millions of OGX shares. Pimco (ALV:GR), manager of the world’s largest bond fund, owned $576 million in OGX bonds. General Electric (GE) took a 0.8 percent share in EBX valued at $300 million. Brazilians “should be very proud” of what Batista and OGX had achieved, said Rousseff, sporting her own orange OGX jacket onstage at the Açu port. “OGX has a big contribution to make in the offshore oil production of Brazil.” Batista, in an interview a few days later with investment conference host Michael Milken in Beverly Hills, declared Rousseff’s appearance at his port not simply a feather in his cap but also “a major event for Brazil.” To say Batista overreached would be to seriously undersell what has happened in the 18 months since that self-regarding presstravaganza of hubris and magical thinking. In what is shaping up to be one of the largest personal and financial collapses in history—if not the largest—Batista may be nearing bankruptcy. On Oct. 1, OGX missed a $45 million interest payment on bond debt it had racked up during its rise. Batista has sold his planes and his helicopter, and creditors are arguing over the remains of his companies. He’s no longer on the Bloomberg Billionaires Index and has become the butt of jokes in Brazil. One suggests that Pope Francis plans to return to Brazil soon and will again be visiting the poor, including Batista. Read How Brazil's Richest Man Lost $34.5 Billion here .
  • Making the Economic Case for an Independent Scotland

    Scotland's First Minister, Alex Salmond , is leading the charge for Scottish independence. Were this a political science or government blog, we'd have a lot to unpack on the underlying cultural and historical push for independence. But here, we are more interested in the economic justification for such a bold move. Speaking at the Carnegie Council , Salmond put prosperity front and center, and pointed to the success of small nations as one selling point for an independent Scotland. And he raises an interesting question: in today's global economies, is is better to be smaller? Here is an excerpt from his talk: You can heard the full talk here .
  • The Crack Spread and Gas Prices

    We tend to look away from a lot of reports on rising gas prices. Much like weather, gas prices are low hanging fruit for news media to attract eyeballs without providing any real analysis. But there are exceptions. In the below interview, for example, the Wall Street Journal 's Paul Vigna explains exactly why prices are up again, and it provides a nice case study on how the various parts of a supply chain affect consumer costs. In the case of the most recent rise, it has to do with the gap between what refiners get for the price of crude oil and the price of wholesale--or "the crack spread":
  • Oil Prices Due for Market Correction in 2013

    It is near the end of another record breaking year of revenue for oil producers. And yet the Wall Street Journal 's Liam Denning says we should not expect a "party atmosphere" at this week's OPEC meetings. 2013, Denning says, will likely bring a major market correction. The growth in global oil demand has slowed. And with major developed markets continuing to struggle, and consumers wary of high prices, that growth rate is unlikely to get back to pre-recession levels. Denning discusses the state of oil prices on Markets Hub:
  • James Hamilton: Charting Potential Drop in U.S. Oil Consumption

    In an effort to determine whether consumption of oil in the U.S. will continue to decline, James Hamilton took a look at fuel efficiency. The average miles-per-gallon for cars in America has been rising. Assuming that current efficiency standards are not dropped, then average mpg will continue to rise as older models head for the scrap heap. Hamilton sketches out the projection at EconBrowser : Hamilton: Given the history of the average mileage of new vehicles sold each year (the blue line in the figure above) and an assumed fraction of cars of each age still on the road implied by the exponential distribution, I calculated the current average fuel economy of the existing fleet to be 27 mpg-- this is essentially just a geometric weighted average of the most recent values for the blue line in the graph above. If new cars offer 33 mpg, the average fuel economy of the existing fleet will continue to rise with time even if nothing else changes. For example, if the fuel efficiency of new cars sold in 2013 is no better than it was in 2012, the average fuel economy of the typical car on the road will improve to 27.6 mpg next year as more 33 mpg cars replace some of the less fuel-efficient models currently on the road. If there are no further improvements in fuel efficiency over the next decade, I calculate that the average car on the road would be getting 30.5 mpg by 2020. However, current Corporate Average Fuel Economy (CAFE) rules call for increasing mileage standards over this decade. MIT Professor Christopher Knittel estimates that technological progress would allow average miles per gallon to grow by about 2% per year with constant vehicle size and horsepower, and torque, and faster if we gradually move to smaller cars. In Scenario 2 in the graph above, I assume that the average miles per gallon of newly sold vehicles increases by 2.5% per year. That would result in slightly better mileage each year than anticipated to result from current CAFE standards. Under this scenario, the average efficiency for existing cars would rise to 27.7 mpg in 2013 and 32.8 by 2020, when the average new car sold in 2020 is assumed to get 40.5 mpg as measured by the NHTSA (translating into a presumed EPA sticker mileage of perhaps 30 mpg). The next question is how much a reduction in consumption this would translate into. First suppose that the total number of miles driven never goes up from 2012 levels. That would mean a ratio of gallons consumed in 2013 to gallons consumed in 2012 of (27.0/27.6) = 0.978 or a 2.2% reduction under Scenario 1 and a 2.4% reduction under Scenario 2. By 2020 we would have an 11.4% reduction under Scenario 1 and a 17.8% reduction under Scenario 2. Read the full post here .
  • Some African Countries that May Avoid the Resource Curse

    Simon Zadek is hopeful that resource rich countries can in fact avoid the commodities curse. And he isn't looking at the current positive models. Norway and Chile seem to have avoided the curse so far, but Sadek notes that those economies have not sufficiently diversified. Instead Zadek, Senior Adviser at the International Institute of Sustainable Development and Senior Fellow at the Global Green Growth Institute, is looking to Africa. From Project Syndicate : Countries across Africa – including Ghana, Liberia, Mozambique, Rwanda, and Uganda – are showing early signs of success. Zambia recently issued a $750 million inaugural ten-year bond at an annual interest rate of 5.375%. Oversubscribed by 24 times, the issue will allow Zambia to borrow more cheaply than many European countries can. Such developments reflect growing confidence in Africa’s economic prospects and, thus, in its ability to escape the resource curse. But these countries still face significant obstacles to development. First, governments must balance long-term goals with short-term achievements. Given unlimited time, less-developed commodity-rich countries would first invest in human capital and institutions, then direct their growing commodity revenues into infrastructure, and move on to diversify their economies by strengthening the agriculture, manufacturing, and service sectors. In the real world, of course, such countries’ political economies demand short-term gains, beginning with basic services like potable water and electricity. If governments fail to respond to these basic demands, citizens take to the streets, often destructively. This summer in Guinea, for example, citizens’ frustration with widespread poverty and weak institutions, memories of ethnic persecution, and distrust of unfamiliar democratic processes fueled violent protests. Second, development requires both money and the right conditions. But, in many cases, the conditions placed on funding create barriers to investment. Read One Flew Over the Resource Curse here .
  • Sinopec Moving Toward Joint Ventures Rather Than Takeovers

    The Wall Street Journal 's Simon Hall reports on a shift in strategy happening at China oil giant Sinopec. Instead of buying Western companies, Sinopec is reportedly working to build partnerships, or joint ventures. And this could have marked implications for global energy business as Chinese companies become more and more influential.
  • IMF on Oil and Growth: The Haves and the Have-Nots in the Middle East and North Africa

    To describe the economic outlook for the Middle East and North Africa as mixed doesn't quite tell the story. It is more accurate to say that the outlook is a divided one. According to the IMF 's newly released outlook for the region, there is a sharp distinction between members of the Gulf Cooperation Council (GCC) and non-members, and it all comes down to who has the oil. The IMF labels the exporters as "Faring well:" But the importers are not growing enough to support their communities' basic needs: As divided as these two graphs are, they are connected, and the IMF warns oil exporters to shore up their economies to prepare for slower growth. Read the IMF's Regional Outlook for the Middle East and Central Asia here . The IMF's Masood Ahmed discusses the top findings of the report below:
  • Encouraging Disruption from Within: Shell's GameChanger Program

    Our instincts tell us that it is easier to manage innovative ideas at smaller companies with fewer moving parts and people. But the big guys have resources that little guys do not. And it is possible to seed a successful culture of innovation in very large organizations and corporations (think BASF). But can big energy companies manage disruption and change from within? Mandar Apte thinks so. He works at Shell , where he is a part of an internal innovation program called GameChanger. Apte discussed the program with Knowledge@Wharton 's Mukul Pandya :
  • Economic Letter: Cheaper Gas Has Not Brought Lower Energy Expeditures for Consumers, Yet

    Oil and natural gas prices started to deviate over the last few years. While oil rose higher, natural gas did not follow. So what did this mean for consumers? They turned to natural gas more, but according to San Francisco Fed economists Galina Hale and Fernanda Nechio , the significant shift toward gas did not make a big dent in energy prices overall. At least not yet. Some changes in key sectors (transportation, especially) could provide enough to tip the balance and provide real change in energy costs. From Hale and Nechio's Economic Letter : Figure 2 shows the share that energy and its components—gasoline, electricity, and natural gas—represent in total consumer expenditures. Gasoline and other petroleum products make up the bulk of consumer energy expenditures in terms of dollars spent. In March 2012, energy accounted for about 6% of total consumer expenditures, with petroleum-related products accounting for two-thirds of this share. Moreover, Figure 2 shows that energy expenditures follow the movement of gasoline expenditures very closely. There is little evidence that lower natural gas prices eased the effects of higher oil prices on consumer energy expenditures. Shouldn’t the large change in the relative prices of oil and natural gas induce businesses and consumers to substitute gas for oil? Figure 3 indicates that the ability to do so is limited, at least in the near term. In the past, electrical utilities were the only sector that substituted gas for oil. But this substitution has mostly been completed, leaving little scope for further decline in the share of oil in electricity production. However, in the long run, a persistent price divergence might encourage substitution in other sectors. Transportation in particular already has the technology to use natural gas and the current share of oil in the sector is close to 100%. In addition, the industrial sector could potentially make greater use of natural gas. Still, given the elaborate infrastructure devoted to petroleum, none of these changes can happen quickly. Read Pricey Oil, Cheap Natural Gas, and Energy Costs here .
  • Managing Trade, Resources in the Vibrant Arctic

    When you see the term "emerging markets," what comes to mind? Brazil, China, India, Viet Nam all seem likely answers. But the Arctic? It isn't a place that comes to mind as an emerging market for us. But according to Bruce Jones of Brookings , not only should we see the Arctic as an emerging market, we should see it as one of the globe's most vital markets for trade and natural resources. Jones, director of the Managing Global Order (MGO) project at Brookings and director of the Center on International Cooperation at New York University, says that the future of the Arctic economy depends on sorting out sovereignty in the region in a way that encourages trade rather than provokes conflict: