Evolution of the oil sector

Evolution of the oil sector

Evidence on the traditional resource curse conundrum:

The evidence which supports the traditional resource curse hypothesis suggests that there is a negative relationship between resource abundance and economic growth in resource rich countries.

Sachs and Warner (1995)1:

Jefrrey Sachs and Andrew Warner were the first who tested empirically the association between resource abundance and economic growth. In their paper, they showed; using a cross country growth regression; that economies with a high ratio of natural resource exports to GDP in 1970 (the base year) tended to grow slowly during the subsequent 20 years period 1970-1990. Their finding remains significant after controlling for a large number of additional variables which include, initial GDP; openness policy; investment rates; human capital accumulation rates; changes in the external terms of trade; terms of trade volatility; inequality and the effectiveness of the bureaucracy. They also found that the effect appears when adding regional dummy variables and introducing alternative measures of resource abundance.
Seeking to assess the pathways behind the negative resource intensity-growth association, Sachs and Warner explored a simple empirical model based on four main hypotheses. One is that high natural resource abundance leads to increased rent-seeking and corruption which would show up in the measure of bureaucratic efficiency. The second is that high resource wealth encourages developing countries to pursue state-led development strategies as try to combat the Dutch Disease effects which lower the growth rates through low investment. The third hypothesis is that such countries would have higher overall demand and higher relative prices of non-traded goods which affects the relative prices if investment, and finally, the high 1 Sachs J. and Warner A., “Natural resource abundance and economic growth”, National Bureau of Economic Research, Cambridge 1995.
resource abundance leads to increase aggregate demand that shifts labor away from high learning by doing sectors and depresses growth in labor productivity.
The authors also built a dynamic Dutch Disease endogenous growth model to support their results and close the formal gap in the literature dividing the economy into three sectors (tradeable, non-tradeable and the resource sectors) where the tradeable manufacturing sector matters in the effects of endogenous growth.

The study of Gylfason and Zoega (2002)1:

Gylfason and Zoega (2002) demonstrated empirically and theoretically the role of the natural resource dependence to reduce economic growth by increasing inequality.

Using seemingly unrelated regression (SUR) estimates of a system of five equations for a sample of 87 countries over the period 1965-1998, the authors tried to reveal how natural capital intensity can affect growth directly and indirectly through various channels:
investment, education and inequality.
The empirical results of Gylfason and Zoega can be summarized as follows:

  • There is a negative direct effect of the natural capital share (resource dependence) on
    economic growth;
  • A negative indirect effect is shown through investment and education, so that, an increase in natural capital share decreases investment rate and the secondary school enrolment rate with 0.20 and 0.03 respectively which affects in turn the economic growth (a positive correlation exists between investment and education and economic growth);
    1 Gylfason T. and Zoega G., « Inequality and economic growth : do natural resources matter ? », CESifo working paper N° 712, April 2002.
  • Other negative indirect effect via the Gini index1 (income distribution). An increase in natural capital share raises income inequality which will reduce economic growth with 0.04 point. Thus, the authors concluded that natural capital intensity reduces growth directly as well as indirectly by reducing equality, secondary school enrolment rates and investment rates which leaves an important role for public policy to be used to encourage growth by enhancing equality.

Oil economics in Algeria:

Evolution of the oil sector:

Algeria has been one of the most important oil and gas producers and exporters. The development of these two industries started in 1958 after the discovery of two giant oil and gas fields at Hassi Messaoud and Hassi R’mel in the northern Sahara region.
Algeria has applied a controlled and socialist economic system from the independence to the late of 1980s. Consequently, the national and state-owned oil company SANATRACH created in 1963 was responsible only for the transportation and marketing of hydrocarbon products. In 1971, after the nationalization of this sector, SONATRACH became a quasi monopoly in oil production.
The hydrocarbon law of 1986 allowed the foreign companies to participate in the oil exploration where the maximum limit of the partner’s share is 49% under the economic reforms starting in the 1980s. The main principles of this law were:

  • The property of hydrocarbon reserves belongs to the nation;
  • The exploration and exploitation activities are state’s monopoly while their performance may be associated with foreign oil companies;
  • Obligation for any foreign investor to enter into exploration contracts with SONATRACH and the partnership on the already discovered fields is not authorized.

The amendments of the law introduced in 1991 also expanded the possibilities for foreign participation while the law of 2005 and its amendments provided more open possibilities:

  • Establishing competition in free market;
  • Separating the operations of the state from SONATRACH;
  • Establishing two independent regulatory agencies (ALNAFT1 and ARH2) in order to ensure regulation of the liberalized hydrocarbon sector;
  • Establishing transparency in contracts awards.
    Although these legal reforms, SONATRACH still dominates the hydrocarbon sector with its double role as both a producing company and a regulatory of the hydrocarbon sector and is ranked the 11th among world oil companies.
    Regarding the production, the crude oil was at the centre of the expansion of hydrocarbon sector after the independence of the Algerian state. At the beginning of 1980s, oil production and exports declined remarkably because of OPEC’s constraints to stabilize the world oil price. Indeed, between 1980 and 1982, the export share of crude oil decreased from 80% to 30%.

 Management of oil revenues:

After the independence and during the period 1963-1988, windfall revenues were largely wasted on large-scale, state-controlled heavy industry projects which were not well-integrated into the small domestic private sector or the international economy.1 Algeria has further built up a huge external debt following the decline in world oil prices in 1986. In the 1990s, Algeria went through a severe situation; civil war in which 100000 people were killed, very bad financial position with large external debt from international institutions (International monetary fund and World Bank). From the year 2000, Algeria entered a new era, era of economic recovery after the black decade of the 1990s. Where the soaring oil prices have sent its economy on a boom, allowing it to pay off debt, build up major reserves and draw interest from foreign oil companies. But Algeria, worried about its failure to diversify its economy beyond the energy sector and is facing a big challenge.
In this section we are going to present the main Algerian economic policies adopted to manage its oil windfalls, reduce the effects of revenues fluctuations and enhance economic growth from 2000 till now, since it is the period of our empirical study.

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Table des matières

List of tables
List of figures
I. Theoretical review
Chapter introduction
I. 1- The resource curse hypothesis
I. 1-1. Economic explanation
I. 1-1-1.Dutch Disease
1-1-1-a. Gregory model
1-1-1-b. The core model: (Cordon and Neary 1982)
-1- The “Spending effect”
-2- The resource movement effect
1-1-1-c. The monetary effect: S.Edwards(1985)
I. 1-1-2. Procyclicality of fiscal policy
I. 1-1-3. Volatility of commodity prices
I. 1-2 Political and institutional view
I.1-2-1. Role of politics
a-Cognitive approach
b-Societal approach
c-Statist approach (state-centered explanation)
I.1-2-2 Institutional quality
I. 2- Oil price volatility issue
I. 2-1- The causes and effects of oil volatility
I. 2-1-1- The causes
a- Supply and demand for oil (market fundamentals)
b- Behavioral changes
I. 2-1-2 The effects of oil price volatility
a- Macroeconomic volatility
b- Volatility and growth
I. 2-2- Means to reduce volatility effects
I. 2-2-1 Fiscal policy
a- Oil funds
b- Fiscal rules and fiscal responsibility legislations
c- Budgetary oil price
I. 2-2-2 Role of financial development
I. 2-2-3- Role of economic diversification
Chapter conclusion
II. The empirical evidence 
Chapter introduction
II. 1- Evidence on the traditional resource curse conundrum
II.2- Evidence on the volatility channel of the curse
II.3- Issues raised by empirical evidence
Chapter conclusion
III. The econometric study
Chapter introduction
III.1- Oil economics in Algeria
III.1-1- Evolution of the oil sector
III.1-2- Management of oil revenues
III.1-3- Economic growth and oil revenues
III.1-4- The political and institutional environment
III.2- Data and Methodology
III.2-1- Description of the data
III.2-2- Methodology
a- An overview of the OLS estimation method
b- Methodology used in the study
III.3- The empirical results
Chapter conclusion
Conclusion and recommendations

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