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  • Print publication year: 2016
  • Online publication date: August 2016

5 - Not manna from heaven after all: the endogeneity of oil


Why have some countries discovered bountiful amounts of oil? Why are many of these countries also willing and able to export it, thus allowing them to finance the consumption of goods and services produced elsewhere? Why do their governments rely on these exports for the lion's share of their revenues? Conversely, why do other countries instead import petroleum in equally large quantities to fuel the assembly of products consumed at home, if not exported abroad?

The most popular answer to these questions is geology. The presence of large, shallow, and easy-to-access sedimentary basins is crucial to extracting high-quality oil, at low costs, and in large volumes. In other words, a natural lottery plays an outsized role in determining where oil exploration, oil production, and oil exports occur. You've either got oil or you don't.

Consider Saudi Arabia. The areal extent of the Arabian plate's northeast margin shelf endows it with ideal conditions for plentiful, easy-to-extract oil. It has superior carbonate and sandstone reservoirs in good juxtaposition. It also possesses top-notch regional seals and expansive anticlinal traps due to repeated and extensive source rock beds over geological time (see Beydoun 1998). These are ideal conditions for easy to extract, high-quality oil. It is no wonder, therefore, that Saudi Arabia has the world's largest conventional reserves of petroleum.

Yet, as this chapter will make clear, geology is not the whole, nor even the most important, story. Once we hold oil endowments constant, oil producers generate wildly differing degrees of oil extraction. Figure 5.1 adduces this fact by graphing the residuals calculated from an Ordinary Least Squares estimation where countries’ rate of oil extraction, proxied for by Fuel Depletion percent GNP, is regressed against their underlying oil wealth. Countries with a positive value exhibit a level of oil rents that is higher than would be expected from their underlying endowments; a negative value means countries exhibit lower oil rents than predicted by nature alone.

Simply put, geology does not explain that much of the variation. The r-squared from the underlying regression is a paltry 0.06; the standard deviation of the residuals is 20.9 percentage points; and the most oil-extractive quartile of countries evinces about 26 percentage points more extractiveness than the least oil-extractive quartile.

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