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Institutions and the Location of Oil Exploration

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  • James Cust
  • Torfinn Harding

Abstract

We provide evidence that institutions strongly influence where oil and gas exploration takes place. To identify the effect of institutions, we utilise a global dataset on the location of exploration wells and national borders. This allows for a regression discontinuity design, with the key assumption that the position of borders was determined independently of geology. To break potential simultaneity between borders, institutions and activities in the oil sector, we exploit the historical sequence of drilling occurring after the formation of borders and institutions. At borders, exploration companies choose to drill on the side with better institutional quality 58% of the time. The results are consistent with the view that institutions shape exploration companies’ incentives to invest in drilling as well as host countries’ supply of drilling opportunities. It follows that the observed distribution of natural capital across countries is endogenous with respect to institutions.

Suggested Citation

  • James Cust & Torfinn Harding, 2013. "Institutions and the Location of Oil Exploration," OxCarre Working Papers 127, Oxford Centre for the Analysis of Resource Rich Economies, University of Oxford.
    • Handle: RePEc:oxf:oxcrwp:127
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    Keywords

    institutions; investment; oil and gas exploration; regression discontinuity design;
    All these keywords.

    JEL classification:

    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • O13 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Agriculture; Natural Resources; Environment; Other Primary Products
    • O43 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Institutions and Growth
    • Q32 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - Exhaustible Resources and Economic Development

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