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What Determines Investment in the Oil Sector?: A New Era for National and International Oil Companies

  • Lyudmyla Hvozdyk
  • Valerie Mercer-Blackman
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    This paper discusses recent trends in investment in the oil sector, amid new challenges for national and international oil companies in an increasingly supply-constrained environment. After more than a decade of stagnant investment rates, nominal investment has picked up sharply over the three years ending in 2007, but soaring costs (including from higher tax rates and royalties) meant that investment growth was minimal in real terms. The paper performs econometric tests using the Arellano-Bond GMM technique. It finds that `below ground¿ risks are statistically very important in deterring real investment. Companies are taking on increasingly complex geological challenges, which are putting upward pressure on production costs and are leading to greater project delays compared to the past. As many of these factors are expected to persist, supply constraints are likely to remain a dominant factor behind oil price fluctuations during the next several years.

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    Paper provided by Inter-American Development Bank in its series IDB Publications (Working Papers) with number 9393.

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    Date of creation: Aug 2010
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    Handle: RePEc:idb:brikps:9393
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    1. Favero, Carlo A. & Pesaran, M. Hashem, 1994. "Oil investment in the North Sea," Economic Modelling, Elsevier, vol. 11(3), pages 308-329, July.
    2. Nickell, Stephen J, 1981. "Biases in Dynamic Models with Fixed Effects," Econometrica, Econometric Society, vol. 49(6), pages 1417-26, November.
    3. Arellano, Manuel & Bond, Stephen, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," Review of Economic Studies, Wiley Blackwell, vol. 58(2), pages 277-97, April.
    4. Guro Børnes Ringlund & Knut Einar Rosendahl & Terje Skjerpen, 2004. "Does oilrig activity react to oil price changes? An empirical investigation," Discussion Papers 372, Research Department of Statistics Norway.
    5. Richard Blundell & Stephen Bond, 2000. "GMM Estimation with persistent panel data: an application to production functions," Econometric Reviews, Taylor & Francis Journals, vol. 19(3), pages 321-340.
    6. Caballero, R.J., 1990. "A Fallacy Of Composition," Discussion Papers 1990_01, Columbia University, Department of Economics.
    7. Hartley, Peter & Medlock III, Kenneth B., 2008. "A model of the operation and development of a National Oil Company," Energy Economics, Elsevier, vol. 30(5), pages 2459-2485, September.
    8. Favero, Carlo A & Pesaran, M Hashem & Sharma, Sunil, 1994. "A Duration Model of Irreversible Oil Investment: Theory and Empirical Evidence," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 9(S), pages S95-112, Suppl. De.
    9. Stacy Eller & Peter Hartley & Kenneth Medlock, 2011. "Empirical evidence on the operational efficiency of National Oil Companies," Empirical Economics, Springer, vol. 40(3), pages 623-643, May.
    10. Dermot Gately, 2004. "OPEC's Incentives for Faster Output Growth," The Energy Journal, International Association for Energy Economics, vol. 0(Number 2), pages 75-96.
    11. Helmi-Oskoui, B. & Narayanan, R. & Glover, T. & Lyon, K. S. & Sinha, M., 1992. "Optimal extraction of petroleum resources : An empirical approach," Resources and Energy, Elsevier, vol. 14(3), pages 267-285, September.
    12. Jaime Casassus & Pierre Collin-Dufresne & Bryan R. Routledge, 2005. "Equilibrium Commodity Prices with Irreversible Investment and Non-Linear Technology," NBER Working Papers 11864, National Bureau of Economic Research, Inc.
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