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Uncertainties and petroleum resource production in developing countries

University of British Columbia

When making economic analyses about a certain industry, it is essential to make some basic assumptions. One of these assumptions is either certainty or uncertainty. With certainty, predictions about economic behaviour can be made less cautiously. The petroleum industry is alleged to be influenced by elements of uncertainty, hence we expect that most of the decisions made in the industry are governed by expected uncertain outcomes. The task of this study, therefore, was to find out what the uncertainties might be in the petroleum industry of the developing countries. First, we discovered that governments of the developing countries may expect far too much from their oil resources. This expectation may be derived from various sources. One of them is the foreign exchange necessary to buy arms to defend their territories (like in the Middle East). Another source may be the pressing needs to accelerate economic growth. Finally, some of the countries may simply wish to be nationalistic. Regardless of the source, these expectations lead to some uncertainties in the industry. Secondly, some uncertainties are created by the oil producing companies themselves. By accumulating very large capital relative to companies in other industries, companies make themselves vulnerable to political policies. And one reason why this accumulation of large capital is possible is that their home governments have provided the economic incentives for them to expand. Thirdly, there is some degree of uncertainty specific to the petroleum industry. In the exploration stage, any addition to capacities is random. This randomness imposes uncertainties about the supply conditions in the industry. Also, there are a series of uncertainties about whether oil can be found in certain place or not, qualities and quantities that are of commercial values, the changes in the reservoir conditions during productions and the usual uncertainties which face any industries, i.e. price or demand conditions, and cost or supply conditions. Lastly, the governments and oil companies jointly agree to maximize the total profits of oil by seeking a common price policy but there is a reasonable degree of uncertainty about how to share this profit. We fall short of finding an optimum device for sharing the rent. However, we can conclude that the optimum rent sharing policy depends largely on the time horizon of the government of the developing country, and the type of economic growth it prefers.

Text

2011-06-14

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http://hdl.handle.net/2429/35418

Economics

University of British Columbia

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