Oil price effects on optimal extraction–exploration and offshore entities: An applied-theoretical and empirical investigation in oil-rich economies

Solomon Deku and King Yoong Lim

Energy Economics, 2024, vol. 129, issue C

Abstract: We present a novel open-economy endogenous growth framework that integrates an optimal extraction-to-exploration (“extraction rate”) problem and a principal–agent style offshore investment and appropriation choice problem. Using a combination of applied-theoretical simulation and econometric analyses, we investigate the nexus between oil price and the extraction rate, as well as the relationship between extraction rate and offshore appropriation, focusing on offshore entities in tax havens associated with 31 oil-rich economies from 1979 to 2020. Consistent with recent literature and aggregate evidence, our benchmark simulation results find the first nexus to be negative, but positive if we impose a decreasing return to exploration specification. Regarding the second nexus, except for economies with large initial net foreign asset (NFA) positions, we find a positive association between offshore inactivation and the extraction rate. We also present empirical evidence to corroborate the benchmark results (with constant returns to exploration): a negative association between oil prices and extraction rates, which is further associated with a lower number of offshore entities.

Keywords: Appropriation; Energy macroeconomics; Offshore leakages; Oil-rich open economies; Optimal extraction–exploration (search for similar items in EconPapers)
JEL-codes: E26 E69 F41 K42 O41 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:eneeco:v:129:y:2024:i:c:s0140988323007612

DOI: 10.1016/j.eneco.2023.107263

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