GGP: Macroeconomic Impacts Of Oil and Gas Discoveries in New Producing Countries
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This is an excerpt from a paper by the King Abdullah Petroleum Studies and Research Center (KAPSARC) published in October 2016.
Policymakers in new commodity producing countries are inundated with warnings about the resource curse, Dutch Disease and absorptive capacity constraints. While these are all significant policy issues related to developing natural resources, there is also growing evidence that unexpected macroeconomic impacts can occur almost immediately after the announcement of new oil and gas discoveries. These initial macroeconomic impacts, such as drop in employment, rise in savings and decline in investments, are probably tied to the expectations of government officials, private sector and society at large on what this new resource wealth will mean for their country.
In many new producing countries, there is a collective capacity building process that must occur after commercially viable discoveries are announced. During this period when technocrats and government officials are learning about the natural resources and their responsibilities to manage the sector, there will be political pressure to begin borrowing against expected future revenues. The crucial question for policymakers is the risks of borrowing now against expected future revenue versus the welfare benefits of spending the money immediately or 10-20 years, later once the fields start producing.
The expectations of a country’s stakeholders are set in this early period shortly after the discoveries are announced. While the initial focus is rightfully on enabling exploration and production, there is also an early role for the ministries of finance to begin to manage the expectations of these stakeholders.
In many ways, managing these expectations is just as important as assessing the traditional macroeconomic impacts that can be expected when monetizing a finite resource base. As literature from the resource curse shows, many countries that have developed oil and gas reserves have not seen positive growth outcomes, and in some cases have been worse off than they were before the discovery of natural resources.
Kapsarc
The statements, opinions and data contained in the content published in Global Gas Perspectives are solely those of the individual authors and contributors and not of the publisher and the editor(s) of Natural Gas World.