Essays on oil: project evaluation and investment impact

Abstract

This thesis contains three essays related to fixed investment and crude oil. The first essay examines the implications of building a cross-border oil infrastructure project within the context of the bargaining problem (the Nash bargaining solution, and the alternating offer bargain of Rubinstein). We examine the viability of the Baku-Tbilisi-Ceyhan oil pipeline project, which is employed as a case study - for the multinational corporation, and the three host countries (Azerbaijan, Turkey, and Georgia) by examining the profitability of the project for each partner with two different bargaining formulations (simultaneous and sequential bargaining). The findings suggest that the project is feasible for the partners when the transit charge is greater than $3 per barrel (this is the Break-Even charge at which the project produces a zero total surplus); but for a tariff charge higher than this rate, the project generates returns for each participant greater than his outside option. Furthermore, the outcomes show how with bargaining over discounted flows, each bargaining scenario results in a different total surplus. Thus, the participants’ discount rates, their bargaining orders, and their outside options are the determinants of the gross payoffs they receive over the life of the project. The second essay examines the effect of oil abundance on domestic investment in 22 oil-exporting non-OECD countries over the period 1996-2010. Employing static and dynamic panel estimators, the oil impact is investigated in light of other investment determinants which reflect government policies including output growth, inflation, the exchange rate, and financial and openness factors. Estimation results indicate that oil abundance exerts an adverse effect on gross domestic investment in these countries, implying the necessity of improving institutional quality and oil management polices to better exploit oil revenues and direct them towards enhancing domestic investment, thereby sustained economic growth in these countries. The third essay examines the effect of the oil price and oil price volatility on domestic fixed investment in a group of oil-importing OECD countries from 1970 to 2012 within the framework of the production function. Estimation results indicate that there is a long run relationship running from oil prices and the other control variables (output, trade, inflation, and the exchange rate) to investment where the long run coefficient on the oil price is negative and significant, but the short run coefficient on oil prices is insignificant. Thus, the outcomes of this study indicate that high oil prices are contributing to investment decline, which affirms the importance of adopting long run energy policies that might lessen investment reliance on non-renewable energy sources.